A key measure of US long-term borrowing has reached its highest level since the early days of the coronavirus crisis, when traders sold government bonds at the end of a brutal quarter.
The yield on 10-year Treasury notes rose a whopping 0.06 percentage point from Monday’s close to 1.77 percent, the highest point since January 2020, according to Bloomberg data.
The new wave came as investors weighed in on ongoing optimism about the introduction of the vaccine in the US and another plan to boost tax incentives.
US bond markets have led to a global slump in government debt since January as investors worry that the Federal Reserve will warm the economy, with massive amounts of government spending coupled with monetary stimulus to drive up inflation.
A broad Bloomberg Barclays index of debt issued by developed market governments around the world has fallen 5 percent on a total return basis since the beginning of the year, representing four consecutive quarters of increases.
“The curve has to be recalculated for higher inflation and a higher growth regime,” said Antoine Bouvet, senior interest rate strategist at ING.
President Joe Biden promised Monday that by mid-April, 90 percent of American adults would be eligible for the Covid-19 vaccine and have access to a vaccination site within five miles of their home. On Wednesday, the president will travel to Pittsburgh, Pennsylvania to plan for a $ 3 trillion infrastructure package following this month’s $ 1.9 trillion tax incentive bill.
Rupert Thompson, chief investment officer at asset manager Kingswood, said the “massive” scale of stimulus measures in the US and globally “has caused significant inflation anxiety and is behind the recent sell-off in government bonds.”
The five-year US banknote, which sold less than longer maturities this year, was badly hit during Tuesday’s move. The 5-year interest rate reached its highest level since March 2020 at 0.94 percent, after an increase of 0.08 percentage points since the start of the week.
Bouvet said the weakness in the five- and seven-year maturities reflected investor concerns that the Fed will hike interest rates ahead of schedule if inflation above target threatens the central bank’s extremely loose policy stance. “No matter how much warning we get from the Fed, at some point they will have to raise interest rates,” he said.
European government debt also came under pressure on Monday, with the German 10-year yield on German government bonds hitting its highest level in more than a week at -0.27 percent. The UK’s 10-year gold yield was 0.84 percent, up from 0.74 percent at the start of the week.
Germany’s National Debt Agency added € 2.5 billion to its second-quarter financing plans on Tuesday after Chancellor Angela Merkel’s cabinet approved a fiscal stimulus last week to support Covid-19’s economic recovery.
“The shift in US Treasuries is dragging the European bond markets into higher yields,” said Imogen Bachra, European interest rate strategist at NatWest Markets. She said the move is likely to be a “combination of fears of forced liquidations in stock declines and the focus shifting back to the next fiscal package.”
Sharp moves in bond trading earlier this year have rocked stock markets, although Wall Street futures trading in European trades has been moderate. Futures for the tech-heavy Nasdaq were down 0.4 percent, while contracts for the blue-chip S&P 500 remained nearly flat.