The yield on the benchmark 10-year U.S. Treasury note hit 1% for the first time since March, after returns from Georgia’s closely watched runoff elections fueled bets that Democrats could win narrow control of the Senate.
By midafternoon in Hong Kong on Wednesday, the yield on the benchmark 10-year U.S. Treasury note was 1.019%, according to Tradeweb, up from 0.955% at its 3 p.m. ET close on Tuesday.
defeated incumbent Kelly Loeffler in one of the Georgia runoffs, according to the Associated Press, while a second race remained too close to call.
Yields, which rise when bond prices fall, started climbing on Tuesday evening as early returns from the elections started trickling in, showing extremely tight races but better-than-expected results for the Democratic candidates.
Wins in both races would effectively give Democrats 51 votes in the Senate, when counting the tiebreaking vote of Vice President-elect
—an outcome that many investors think would herald greater spending on pandemic-relief efforts and other Democratic priorities such as infrastructure projects.
Increased government spending without corresponding tax increases tends to push up Treasury yields partly because it portends more government borrowing and a larger supply of bonds. Depending on the type of spending, it can also drive yields higher by boosting economic growth and inflation and making it more likely that the Federal Reserve will raise short-term interest rates.
If Democrats win in Georgia, “you effectively have your blue sweep,” said Priya Misra, head of global rates strategy at TD Securities in New York. Though it would still be hard for Democrats to pass sweeping legislation, it would at least make it easier for Congress to pass popular measures such as enhanced unemployment benefits or larger stimulus payments, she said.
Other U.S. debt also sold off, with the yield on the 30-year Treasury bond rising 0.088 percentage point to 1.792%, also the highest since March. The dollar weakened slightly, with the WSJ Dollar Index dropping 0.21% to 84.43, its lowest reading since April 2018.
“The market was positioned for the status quo but the odds of a delayed Democratic wave rose as the results from the Georgia runoffs streamed in,” said
a rates strategist in Singapore at DBS Bank. Mr. Leow forecasts the 10-year yield will rise to about 1.3% by the end of this year, after coronavirus vaccines are more widely disseminated.
Long-term Treasury yields play a major role in the economy, helping set interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultralow yields have simultaneously signaled skepticism about the economic recovery and helped bolster it by dragging down borrowing costs and driving investors to buy riskier assets such as stocks and corporate debt.
The 10-year yield’s recovery to 1%, after collapsing to record lows early in the pandemic, reflects a brightening, but hardly spectacular, economic outlook.
Back in March, the yield on the 10-year Treasury note briefly fell below 0.4% on an intraday basis as investors first came to grips with the full implications of the coronavirus crisis. For much of the summer, it remained stuck at around two-thirds of a percentage point.
Yields had climbed further recently following the approval of coronavirus vaccines, which investors hope can tame the pandemic, as well as new legislation designed to support the economy until vaccines are more widely distributed. They had gotten a boost Tuesday from surprisingly strong U.S. manufacturing data.
At the same time, yields remain low by historical standards. That is in large part because investors lived through a decade of slow growth and even-more tepid inflation after the 2008-2009 financial crisis, tempering their expectations for what the economy will look like even after it returns to more normal footing.
One sign of improving investor sentiment is that expectations for annual inflation over the next decade, derived from the difference between nominal and inflation-protected Treasury yields, climbed above 2% this week for the first time since 2018. That rate had fallen as low as 0.5% in March.
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