What is behind the jump in US Treasury bond yields? – Global

On August 4 last year, the 10-year US Treasury bond interest rate was 0.51%. On December 31, the interest rate was 0.92%. Last Thursday, the interest rate on the bond that made up the bench Mark for all interest rates in the global bond market, closed at 1.52% and on Friday fell to 1.44%.

As mentioned, bond yields reached a one-year high towards the end of the week. It is not yet clear exactly what is leading to the radical change, but there are a few things that are affecting yields as well as stock markets and corporate debt.

The first of all reasons, is the market’s expectation of a rise in US inflation. The combination of the expected US economic recovery thanks to advances in vaccination efforts, along with the US administration’s fiscal efforts, is expected to approve an additional $ 1.9 trillion bailout package. The market expects inflation as it was during the crisis of 2008.

Forecasts predict that inflation will probably exceed the Fed’s target of 2%, but this will be the case for a limited time. Some investors expect inflation to rise to 3% at some point, although it is difficult to assess whether price pressures will continue.

In addition, the average break even for 10-year interest rates, which tracks inflation expectations on the part of holders of inflation-linked bonds (TIPS), was 2.15%, which is above the 2% target set by the Fed.

Another factor is the savings created by American consumers, who have had to cut back on cultural spending, but also on tourism and all the indulgences they were used to. The expectation is that when the vaccination campaign reaches its peak, so will household spending, which will push services prices up, which in turn will cause the Fed to raise interest rates – even though the central bank repeatedly says there is no such intention.

But attempts by Fed chiefs, including chairman Jerome Powell, to reassure the market, arguing that rising yields are a sign of economic strength – did not necessarily convince the market. That is, they did not. Thursday’s rise in bond yields “helped “Stock markets fall, with investors re-pricing their investments.

Some argue that the fear of interest rates or inflation alone does not explain the change in bonds. Some think it is a herd effect. A sale led to a sale and led to market crashes, with investors closing more and more positions in 10-year bond contracts – and these pushed up.

What is clear is that almost a year after Black March, which led to historic falls in world stock markets at the onset of the plague and then to rising interest rates and world government quantitative easing, the market is currently nervous and expecting to see what happens next March – with continued gains.