US 10-yr yield rises to 1.2pc, inflation expectations build

LONDON: A US Treasury selloff gathered pace on Monday, with 10-year yields rising to 1.20% and inflation expectations at the highest since 2014 as investors priced an acceleration in economic recovery thanks to President Joe Biden's spending package.

The $1.9 trillion stimulus package looks likely to be approved by Congress, bypassing Republican roadblocks. Friday's lacklustre labour data appeared to highlight the urgency of getting state support to the economy.

Ten-year borrowing costs extended their rise to the highest since last March at 1.2%, while 30-year yields touched 2% for the first time since mid-February 2020 .

Ten-year yields are up around 30 bps since end-2020.

Rabobank analysts said the catalyst appeared to be Treasury Secretary Janet Yellen's comments "where she cited her expectation that, with sufficient fiscal support, the US should be at full employment in 2022".

The Treasury curve steepened further, with the gap between 2- and 10-year yields now at its widest since early-2017 at around 108.4 bps.

The 5-year/30-year Treasury yield gap widened to around 151.50 bps, a new October 2015 high.

Inflation expectations have been steadily rising in recent weeks and on Monday, 10-year breakeven inflation rate rose briefly above 2.20%, the highest since 2014.

Investors will be closely watching inflation data due on Wednesday. Prices had increased 0.4% in December.

"Inflation is becoming a prominent theme with a growing suspicion that its rise could be larger and longer-lasting than the Fed currently anticipating," ING Bank told clients.

The moves haven't yet spooked global equity markets which hit a record high on Monday.