Treasury yields surge amid U.S. stimulus expectations

On the latest edition of Market Week in Review, Senior Quantitative Research Analyst Abraham Robison and Research Analyst Laura Bardewyck discussed the recent movement in U.S. government bond yields, the selloff in tech stocks and key economic data points from the past week.

U.S. bond yields climb on stimulus progress, Powell remarks

U.S. Treasury yields continued their upward climb the week of March 1, Robison said, with the yield on the benchmark 10–year note topping 1.6% during intraday trading on March 5. One of the main reasons behind the ongoing rise is the growing likelihood that Congress will pass President Joe Biden’s US$1.9 trillion stimulus bill, he noted.

“When the plan was originally unveiled, there was uncertainty in markets as to whether its total price tag would be lowered during negotiations in the Senate and House of Representatives. This no longer looks to be the case, with the relief package likely to be approved by Congress at Biden’s initial asking price of US$1.9 trillion,” Robison explained. Such a significant amount of stimulus would naturally lead to a rise in bond yields, he added.

U.S. Federal Reserve (the Fed) Chairman Jerome Powell mentioned the topic of rising yields during a March 4 speech, remarking that the increase has garnered his attention in recent weeks, Robison said. “While Powell noted that he would be concerned by a persistent tightening in financial conditions, his overall comments were dovish in nature,” he observed, explaining that the Fed chair didn’t announce any plans to combat the sharp rise in long–term yields. Powell also reiterated that the central bank was a long way from achieving its goals of full employment and price stability, Robison added. Overall, the Fed chair’s comments led to more selling in the bond market, pushing yields up even further, he observed.

“At the end of the day, the Fed continues to make it clear that it won’t be raising rates any time soon, as nearly 10 million Americans remain out of work and inflation continues to run below its preferred 2% target,” Robison stated. He added that due to the central’s bank recent adoption of an average inflation targeting approach, inflation will actually need to run above 2% for a period of time before the Fed considers hiking again.

Tech stocks swoon as interest rates rise

The rise in Treasury yields has dampened U.S. investor appetite for tech stocks, Robison said, with the Nasdaq Composite Index falling nearly 4% the week of March 1, as of mid–morning Pacific time on March 5. The recent selloff has turned the tech–heavy index negative for the year, he noted.

“The tech sector is especially sensitive to rising interest rates,” he explained, with growth stocks particularly susceptible. By contrast, value stocks have done quite well to start 2021, outperforming growth stocks by approximately 10% so far, Robison said.

U.S. February jobs report tops expectations

Turning to the latest global economic data, Robison said that the J.P.Morgan global composite PMI (purchasing managers’ index) reached its highest level since October last month, logging a reading of 53.2. A reading above 50 points to an increase in growth, and a reading below 50 suggests a decrease in growth. “This number is an indication that the global economy is starting to pick up a bit more,” he remarked.

Zeroing in on the U.S., Ristuben noted that the U.S. employment report for February showed a gain of 379,000 jobs—a number which he characterized as well above consensus expectations.

“With an unemployment rate of 6.2%, the labor market clearly still has a way to go in its recovery, but February’s numbers are a definitive improvement,” he stated. With the U.S. stepping up its vaccination efforts, more businesses are likely to reopen over the next several months, with additional fiscal stimulus likely helping to accelerate the nation’s economic recovery, Robison concluded.

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