Soaring US Treasury yields continue to rise as inflation fears spook markets

Mon 8 Mar 2021
Posted by: William Barns-Graham
Features

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Increasing US Treasury yields and falling bond prices continue to dominate the markets, with 10-year yields now rallying by an impressive 71% in value so far this year.

High yields reflect an increased expectation of inflation due to of President Biden’s $1.9tn stimulus package, which will likely be signed into law with only minor amendments in the next couple of weeks.

According to the FT: “fund managers suspect that inflation is around the corner, a risk to bonds, where rising consumer prices eat away at the value of fixed interest payments.”

Topsy turvy year for dollars

This market trend has seen the US dollar climb in value, with the Dollar Index (DXY) rising from 91.04 at the start of last week to almost 92.4 today (8 March).

The Federal Reserve (FED) chair Jerome Powell avoided mentioning the situation regarding yields in a speech on Thursday and the sell-off of bonds has since gathered further momentum.

The recent surge in value caps off a tumultuous year for the DXY, which reached heights of 103 this time last year in the early days of the Covid-19 pandemic due to its status as a safe-haven asset.

It dropped as low as 89.3 at the start of this year following increasing optimism around the development and roll-out of vaccines for the virus.

Sterling down against the dollar…

Sterling has dropped back from its three-year peak against the US dollar from a couple of weeks ago when it was riding high on news stories about the UK’s successful vaccination programme.

The pound opens the week below US$1.38 in value.

… but up against the euro

The pound has outperformed the euro due to the perception the European Central Bank (ECB) may fight any rise in European interest rates.

Having rallied from lows of around €1.145 against the euro at the end of last month, it approached the €1.165 level as European markets opened today.

Markets will be on the lookout for any indications on future interest rates in a speech by Bank of England (BOE) governor Andrew Bailey today. Markets currently do not expect the UK to introduce negative interest rates.

Spike in oil prices

Oil prices and company share prices have risen following the decision from the OPEC+ (Organization of the Petroleum Exporting Countries) nations to maintain current production costs.

The price spiked over the weekend to $68 per barrel for WTI crude on reports of an unsuccessful attack on a Saudi oil export facility.

The week ahead

Focus will remain on the bond markets and US interest rates, with the US 10-year note currently yielding around 1.6%.

There will also be plenty of attention given to the European Central Bank interest rate meeting on Thursday, with some anticipating a pushback against rising expectations of European inflation.

Economic data 

Highlights this week include:

Today (8 March)

  • German industrial production data
  • EU Sentix investor confidence and consumer inflation expectation surveys
  • Speech from:
    • BOE governor Bailey

Tuesday        

  • German trade balance figures
  • EU GDP and employment releases
  • API weekly crude oil stocks

Wednesday  

  • US Consumer Price Index (CPI) data for February and Crude oil inventories
  • US 10-year treasury auction

Thursday       

  • ECB interest rate announcement and press conference
  • US weekly jobless data and OPEC monthly report

Friday             

  • UK GDP, trade balance and industrial and manufacturing production
  • German CPI release and EU industrial production data