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Treasury Yields Hit New 52-Week Highs as Bond Markets Resume Inflation Sell-Off

Benchmark 10-year bond yields are trading at 1.42%, the highest since February 2020 and the first move past 1.4% in more than a year.

U.S. Treasury bond yields resumed their recent rise Wednesday, touching the highest levels in more than a year, even as Federal Reserve Chairman Jerome Powell attempts to ease markets concerns for near-term inflation. 

Benchmark 10-year Treasury note yields hit a fresh 52-week high of 1.42% in early Wednesday trading, while 30-year bonds were priced at yield-to-maturity of 2.285%, the highest since January 2020. 

The gains have also put the difference, or spread, between 2-year and 10-year notes at around 130 basis points, the widest since early 2017 and a classic market signal for economic growth and faster inflation - a likely outcome from the planned $1.9 trillion stimulus bill that investors expect will pass through the Democratic-controlled Congress later this month.

Fed Chair Powell, however, told lawmakers on the Senate Banking Committee yesterday that any spike in consumer prices that comes with the broader second half recovery will only be temporary, adding that inflation rates remain well shy of the central bank's preferred 2% target.

"Mr. Powell might be right; no one knows what is going to happen to growth or inflation post-Covid, because everything about the situation is unprecedented," said Ian Shepherdson of Pantheon Macroeconomics. "We can point to the massive increase in households' cash balances over the past year as a good reason to expect spending to rocket, but exactly how far and how fast it will rise, and how far prices will increase in response -- if at all -- is unknowable."

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"We can be pretty sure, though, that Mr. Powell and his colleagues are not going to panic and change their tone at the first hint of stronger growth or higher inflation in the spring," Shepherdson added.

Increased government spending is an unambiguous benefit for stocks, with direct payments and business relief cycled into the economy at the quickest rate. But it's also inflationary, given its velocity, and that's never good for the other side of the investment ledger: fixed income markets.

Inflation is, in fact, the so-called "enemy of bonds" because it erodes the value of future payments. And its effect is even more pronounced on longer-term bonds, which the Treasury is likely to rely on in the coming years.

In fact, the new spending commitments, alongside legacy costs linked to tax cuts, will mean the Treasury will likely issue a record net of $1.84 trillion in new bonds this year, according to JPMorgan Chase, a figure that's more than four times last year's total.

Demand, however, remains firm: the Treasury sold $38 billion in 52-week bills yesterday at a record low borrowing cost of just 7 basis points.

Even with that paltry return, though, investors bid for as much as $130 billion, with a bid-to-cover ratio of 3.36.