U.S. Treasury bonds yields rose to the highest levels since March Tuesday, extending a sell-off in fixed income markets linked to concerns over government borrowing, simmering inflation and a possibly hawkish Federal Reserve.
Benchmark 10-year Treasury note yields traded at 1.177% in early dealing, the highest since March and a move that puts their gap over 2-year notes at 1.024%, the highest since May of 2017.
Bond yields have been rising steadily since the November Presidential elections in anticipation of higher borrowing costs for the U.S. government as it boosts pandemic stimulus amid a notable slow-down in new hiring and retail sales. Yields extended that spike, however, following last week's Senate elections in Georgia, which handed control of the upper chamber to the Democrats and paved a path for the early fiscal ambitions of President Elect Joe Biden.
Markets have also been rattled by both the prospect of faster inflation linked to the increased stimulus -- which would hit the economy just as vaccine roll-outs tempt consumers and business back from their lock-down caution -- and hints from the Federal Reserve that it may slow the pace of its monthly bond purchases if the economy improves over the second half of the year.
Earlier this week, in fact, Dallas Federal Reserve President Robert Kaplan said the economy could grow by around 5% this year, a rate of improvement that would trigger an 'earnest discussion' about tapering quantitative easing purchases -- currently running at around $120 billion each month -- later in the year.
Atlanta Federal Reserve bank president Raphael Bostic added to that view when he told a virtual forum that he was not "super concerned" about the rise in longer-term yields and didn't think the Fed would need to track it too closely.
Inflation concerns, which are typically first expressed in the bond markets -- where inflation erodes the value of their future payments -- may be muted at this point in the recovery, given the recent weakness in the labor market and the long march towards normalcy the economy continues to face given the slow progress of vaccine rollout, but they are evident.
Bank of America's 'Flow Show" report last week noted the largest move in to gold since August, and bank stocks like JPMorgan (JPM) - Get JP Morgan Chase & Co. Report, Citigroup (C) - Get Citigroup Inc. Report and Wells Fargo (WFC) - Get Wells Fargo & Company Report, all of which report fourth quarter earnings on Friday, have been outpacing gains for their broader benchmarks amid the bond market sell-off.
However, should inflation materialize without economic growth -- so-called stagflation -- the assumption of higher prices for risk assets, such as stocks and bitcoin, could give way to broader concerns for a double-dip recession.
At present, however, rising bond yields and a steeping yield curve are likely to continue to power markets higher in the coming weeks and months, but close monitoring of the Fed's reaction to those moves will be key for equity investors for at least the remainder of the year.