Why not talk out the 10-year U.S. Treasury yield hit 1.7%

Americans like to say: Go big, or go home.

But after a year of staying at home, investors have begun to worry about losing money, or getting a wrong grip on their investments, if the U.S. government takes over supported the economy and led to anti-inflation.

One reason for the crisis is the sharp, seven-week rise in the yield of benchmark government bonds, by 10-year TMUBMUSD10Y Treasury.
rate at 1.729% on Friday, from a year-ago low of 0.51%.

“There are certain rules,” said Joe Ramos, head of U.S.-based revenues at Lazard Asset Management, about financial markets. “One level is rising in standards.”

We believe that if companies pay more for a loan they will pass on the rising costs to consumers by mocking the prices of goods and services, causing households to spend more, but getting less bang for their buck. . Any loss from consumers could damage the booming economy, even before it reopens from the locks that have been put in place to combat the pandemic of coronavirus infection.

But Ramos also believes that some old rules for financial markets have met the deadline and should be discontinued, especially after a return in the $ 21 Treasury market. trillion U.S. government fell to last year’s low levels.

U.S. Treasurys has been a trusted asset class for institutional investors seeking protection against deregulation, Ramos said, but also cited what led the Treasury’s yield to be so low. last year as a “sign of illness,” when it “looked like the world was going to fall on our behalf. ”

Rising yields in today ‘s environment are coming as more Americans get vaccinated and Google finds Disney DIS,
holiday spike, signs of economy returning to health, according to Ramos. “One thing I’m telling people is that they’re going to be able to pay more, even if it costs more,” he said.

Powell’s Patience

This view depends on the ability of the U.S. to recover some of the 9.5 million jobs lost through the pandemic. Federal Reserve Chairman Jerome Powell said Friday in an op-ed that he intends to support the U.S. economy “as long as it takes,” but added that the outlook has been clear.

Powell called attention to the central bank ‘s remarkable measures to dig financial markets amid the turmoil erupted a year ago by scaling up COVID-19 cases. A year later, the U.S. has jumped ahead of Europe and other parts of the world in terms of vaccines, leaving Wall Street looking for announcements about what’s to come.

“The big picture is that it really doesn’t matter why rates are rising,” said Daniel Ahn, chief US economist at BNP Paribas. “It’s not just the standards, but the facts behind it, and the Fed has been feeling very dangerous about these higher moves, because of the positive outlook on the economy. ”

Ahn also said that credit spreads LQD,
+ 0.15%,
or that the major investors are paid above Finance to compensate for underlying risks on corporate debt, which have not materialized significantly, despite a rapid increase in long-term debt yields. USA over about two months.

US DXY Dollars,
it didn’t make up abruptly either, and the Dow Jones industrial average DJIA,
or S&P 500 SPX,
has sunk into the realm of correction, even though the Nasdaq Composite COMP is heavyweight,
+ 0.76%
has been under pressure. All three criteria held a weekly loss on Friday.

A further 70 basis point increase in the U.S. Treasury’s 10-year benchmark yield over the next two months may be enough to encourage broader market volatility. “But we haven’t seen that yet,” said Ahn.

Related: There will be no rest until the 10-year Treasury yield hits 2%, a strategist says

What? Expensive credit

It is 40 years since the US prime loan rate went over 20%, back when Paul Volcker, former Chairman of Fed, waged a lasting battle against escalating inflation.

Since then, generations of U.S. homeowners have been able to capture 30-year fixed rate mortgage rates at 5% and are now closer to 3%.

“Of course, what inflation means is different for savers and High Street from Wall Street,” said Nela Richardson, ADP chief economist, adding that people were still buying homes and getting home loans. when mortgage rates were 18% in the 1980s.

“Bond investors are more confident in an economy that needs a higher yield to maintain relatively safe assets,” Richardson said, adding that markets tend to make money if yields are higher. height means “the end of free money and almost free credit. ”

Trillions of dollars of pandemic fiscal stimulus from Congress could pass through economy, just as more U.S. vaccines could reopen a wider range of businesses in the summer, anticipating inflation .

“Given that we haven’t seen inflation from Volcker, I think market participants are worried that this could release,” said Brian Kloss, global credit care manager at Brandywine Global.

Kloss said “core businesses, commodities and companies with price power,” should be doing well for shareholders in an inflationary environment, but also warned in the next few weeks, after spring rest gatherings, that the U.S. will have more announcements regarding the status of the COVID-19 threat.

If the US can avoid a spike in new coronavirus cases, unlike Europe where further lock-ups remain a threat, “this could be one of the first signs of a strong summer, which going to fall, ”he said.

At the same time, the bond market seems to already show that it has embraced the Fed’s commitment to maintaining an appropriate monetary policy for the foreseeable future, said Robert Tipp, chief investment strategy income based at PGIM.

It cited Treasury equity rates that recently surpassed 2% as an indication that the bond market expects inflation to rise from critical, equity-based levels, an indication of future price pressures based on rates. U.S. Treasury Department inflation trading – protected securities (TIPS).

But even as 10-year rates climb back to 3% and inflation rises along with new GDP growth forecasts of 6.9% this year, Tripp expects both to fall back to lows which we have known over the past four decades.

Following the global financial crisis in 2008, people were predicting “Armageddon inflation” and that the Fed would never be able to get out of that policy of quantitative easing, he said. e.

“But of course they did,” Tipp said.

Next week we will take a deluge of US economic data. On Monday and Tuesday the sale of new and refurbished homes will be released for February. Wednesday will bring durable goods orders in February, as well as a manufacturing and services sector index update in March.

Thursday’s weekly jobless claims claims data is the final estimate of fourth quarter GDP, and Friday will show the latest data on personal income, consumer spending, core inflation for February and the latest consumer sentiment index reading.