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Markets

Yields at four-month highs, curve steepens on stimulus hopes

  • US House Speaker Nancy Pelosi on Thursday said negotiators were making progress in talks with the White House for another round of COVID-19 stimulus.
  • The market's playing out inflation expectations here, based on expectations that there's more stimulus and, if Biden gets in,
23 Oct 2020

NEW YORK: Benchmark US Treasury yields rose hit four-month highs on Friday and the yield curve steepened on hopes that US lawmakers are close to striking a deal on new fiscal stimulus.

US House Speaker Nancy Pelosi on Thursday said negotiators were making progress in talks with the White House for another round of COVID-19 stimulus, but Senate Republicans remained skeptical of a possible deal costing trillions of dollars.

Even if a deal is not reached, investors see a jump in spending as likely if Democrat Joe Biden wins the Nov. 3 election, with a larger bill more also more likely if Democrats win control of the U.S Senate.

"The market's playing out inflation expectations here, based on expectations that there's more stimulus and, if Biden gets in, that they will do even more spending than we've done under the current administration," said Lou Brien, a market strategist at DRW Trading in Chicago.

New fiscal spending should improve the US economic outlook and raises the prospect of higher inflation, which would send yields higher. The Federal Reserve has also said that it will allow inflation run hotter than previously before tightening monetary policy. A glut of Treasury supply to finance the spending could also weigh on the US bond market.

Benchmark 10-year Treasury yields rose as high as 0.872%, the highest since June 9. It is now edging above its 200-day daily moving average, which it has held under since December 2018.

The yield curve between two-year and 10-year notes steepened to 71 basis points, the widest spread since June 5.

Analysts caution that ongoing economic weakness and global demand for yield could limit any large increase in bond yields. The Fed is also expected to shift more of its bond purchases to longer-dated debt if it sees yields rising faster than economic growth warrants.

Investors have been positioning for rate increases via the eurodollar options and swaptions markets, and any bout of profit taking in these trades could also pull yields back lower.