As U.S. bond yields rise, are inflation worries justified?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Senior Client Investment Analyst Chris Kyle discussed the rise in U.S. Treasury yields, the latest COVID–19 vaccine developments and the outlook for another round of U.S. fiscal stimulus.
Treasury yields soar as markets digest economic recovery prospects
U.S. government bond yields continued their rapid ascent the week of Feb. 22, Ristuben said, with the yield on the 10–year Treasury note topping 1.50% on Feb. 25. “Over the past month, Treasury yields have risen by roughly 45 to 50 basis points, with an increase of 10 to 15 basis points in the past week alone,” he remarked.
The jump in yields has sparked inflation fears among some, but Ristuben stressed that overall, inflation is unlikely to be a problem this year. While rates are likely to increase in the short–term, it’s important to note that much of the year–over–year gains will probably be attributable to the very low numbers observed in the spring of 2020—when inflation plummeted amid the coronavirus–induced economic recession, he said.
“Because of this, inflation rates are likely to come in at higher levels than in 2020—but I don’t foresee inflation becoming an issue this year. Unemployment remains high and capacity utilization remains low, with quite a bit of slack in the global economy,” he explained.
The spike in Treasury yields, Ristuben said, is basically a recognition by the market that a full economic recovery appears increasingly likely, with significant above–trend growth possible on a global basis this year. “It’s really a continuation, to some degree, of the economic reopening trade that has played out in markets ever since Pfizer’s Nov. 9 announcement on the efficacy of its vaccine,” he stated, “and recently, the reopening trade has been on steroids.”
Israeli study points to vaccine success
A big driver in the surge in U.S. bond yields continues to be positive headlines surrounding COVID–19 vaccines, Ristuben noted. A recent Israeli study showed that mass vaccinations of individuals 70 and older led to a dramatic decline in the severity of COVID–19 infections among individuals in the same age range, he said. The study offers proof that what Pfizer and other drugmakers reported in their clinical vaccine trials is holding up in real life, Ristuben said.
“Markets and economists have been projecting strong growth in 2021 due to the ability of vaccines to help return everyday life to a more normal state—and the Israeli study indicates that such a return to normalcy probably isn’t just some fantasy,” he stated. Ristuben added that the expected approval of Johnson & Johnson’s one–shot COVID–19 vaccine by U.S. health regulators is additional good news in the fight to end the pandemic.
U.S. $1.9 trillion–stimulus package: Headed for a March approval?
Turning to the latest on U.S. fiscal stimulus, Ristuben noted that the House of Representatives is slated to approve President Joe Biden’s US$1.9 billion relief package on Feb. 26. From there, the legislation will advance to the Senate, where the most contentious issue in the package—an increase in the federal minimum wage to US$15 an hour—will be stripped out, following a ruling from the Senate parliamentarian, he said.
“The removal of the minimum–wage increase should help the bill move forward largely as is. Ultimately, I think the Democrats will be able to pass this through the Senate with at least 50 votes, perhaps with Vice President Kamala Harris casting the tie–breaking vote,” Ristuben remarked.
Recent polling suggests the relief package, dubbed the American Rescue Plan, has a 70% approval rating among U.S. residents, he added. Highlights of the bill include an increase in federal unemployment benefits from US$300 to US$400 a week, US$1,400 stimulus checks for qualifying individuals, US$350 billion in aid to state and local governments and additional funding for schools, Ristuben explained.
He noted that the impact of December’s fiscal stimulus package on Americans was made readily apparent by a Feb. 26 report showing that U.S. household income increased by 10% during January. “These numbers cement the belief that the average U.S. consumer is generally in a good place, with healthy savings, relatively low debt burdens and a decent infusion of cash on the way. The American Rescue Plan, if approved, will likely unleash some pent–up demand for goods and services,” Ristuben stated, concluding that he thinks the Senate will probably pass the bill in early March.