US Treasury yields return to 1% for first time since March tumult

New York

BENCHMARK US Treasury yields touched one per cent for the first time since the pandemic-driven turmoil in March 2020 on the increased likelihood of Democrats winning control of the US Senate.

The 10-year yield, a key global benchmark interest rate, climbed more than six basis points on Wednesday on expectation that Democrats could win two runoff senate elections in Georgia, paving the way for more spending to revive the US economy.

Rising expectations for a so-called "Blue Sweep" have already seen the yield curve edge steeper and shifted market-based inflation measures higher.

"The Georgia election results have been one of the key uncertainties plaguing global markets - the Democrats pulling ahead has a clear implication on US fiscal policy and bonds," said Andrew Ticehurst, strategist at Nomura Holdings in Sydney. "Additional stimulus would have to be funded and markets have clearly indicated they want to test the one per cent level for Treasuries today."

Treasury yields were gaining ahead of the US elections in November, propelled in part by the expectation of more stimulus under a Democrat-led government. The move then faltered with control over the Senate in balance until the Georgia races, though progress on the Covid-19 vaccine rollouts has also buoyed yields, along with the easing in global trade tensions after a historic post-Brexit agreement.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The spread between five and 30-year bond yields hit its steepest level since November 2016, when Donald Trump's election sparked trades premised on stronger growth and higher inflation. Traders now see US inflation averaging just over 2 per cent per year over the coming decade, the highest level since 2018.

Democrat Raphael Warnock ousted Republican Kelly Loeffler in Georgia, the Associated Press reported, leaving control of the chamber in question until the result of the state's other runoff election is decided.

The climb to one per cent for 10-year bond yields may just be the beginning of its ascent. Should the yields hold and extend from there, investors have said it could spark a domino effect across asset classes if the increase is accompanied by economic recovery and moderate levels of inflation.

A confirmed Democrat sweep could push long-end yields significantly higher, and the Federal Reserve is likely to intervene only if the move jeopardises the current easy financial conditions, according to Ed Al-Hussainy, a portfolio strategist at Columbia Threadneedle. He sees potential for the 30-year yield to climb to 2.25-2.50 per cent from the current 1.76 per cent.

For 10-year Treasuries, the breach of one per cent completes a journey that began on March 3, when early indications of what the pandemic might mean for the US economy pushed the yield below that level for the first time. Over the following week, it fell to a record low 0.314 per cent.

The one per cent level is a key psychological barrier for markets, said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. As investors weigh the impact of a potential Democrat sweep, "I can see 10-year Treasury yields rising to 1.5-2 per cent in short order if more and more uncertainty gets behind us", he added. BLOOMBERG

READ MORE: Democrats on brink of US Senate control; party wins one Georgia race, leading in second