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Bond Report: Treasury yields rise most in two weeks on optimism over Biden’s COVID plan and vaccine prospects

U.S. Treasury yields rose the most in about two weeks on Tuesday, fueled by optimism over President Joe Biden’s plan to fight rising COVID-19 cases and the prospect that vaccines may be more effective than first thought in fighting the new omicron variant.

What are yields doing?

The 10-year Treasury note TMUBMUSD10Y, 1.460% yield rose 6.9 basis points to 1.487%, up from 1.418% at 3 p.m. Eastern Time on Monday. It’s the highest level in more than a week, and the yield’s largest one-day gain since Dec. 6, based on 3 p.m. data, according to Dow Jones Market Data.
The rate for the 30-year Treasury TMUBMUSD30Y, 1.862%, known as the long bond, rose 4.9 basis points to 1.896%, advancing from 1.847% a day ago. That’s the highest level since Nov. 24, and the largest one-day gain since Dec. 8.
The 2-year Treasury note yield TMUBMUSD02Y, 0.658% rose 4.5 basis points to 0.673%, compared with 0.628% on Monday. That’s the largest one-day gain since Dec. 7.

What’s driving the market?

President Joe Biden, who is struggling to get support for the Democrats’ nearly $2 trillion Build Back Better bill in the U.S. Senate, announced new steps Tuesday afternoon to ease the variant’s burden on the healthcare system. Those steps, which were reported earlier in the day, include making 500 million free at-home tests available starting in January and opening vaccination clinics across the country.

Meanwhile, early data now suggest that the COVID-19 vaccines developed by Pfizer PFE and German partner BioNTech BNTX and Moderna Inc. MRNA, bolstered by a booster shot, are effective against infection with omicron. Moderna said data showed a 50-microgram booster dose of its COVID vaccine triggered a 37-fold rise in neutralizing antibodies against the variant.

Read: Data suggest boosters are essential to avoid omicron infection

Lighter-than-usual trading volumes, with the Treasury market closing an hour early on Thursday and remaining closed on Friday in observance of the Christmas holiday, are likely to be a feature of this week’s trading action as investors assess the balance of risks ahead of year-end.

Until Tuesday, yields had been mostly pressured lower due to uncertainty about the economic implications of a lengthier battle with the pandemic and the impact on inflation, which has been surging. The Federal Reserve has signaled that it intends to raise interest rates in 2022 to slow rising inflation, but analysts are concerned that the central bank may be making an error in its policy, which could lead to a recession. Buying of Treasurys, keeping yields anchored, had been at least partly underpinned by this fear.

Tuesday’s $20 billion sale of 20-year Treasurys BX:TMUBMUSD20Y produced the biggest short stop since March as well as strong buyside demand, according to Jefferies LLC economists Thomas Simons and Aneta Markowska.

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What are strategists saying?

“Unsurprisingly, the Treasury price action occurred on low volumes and questionable liquidity given the proximity to the holidays and year end,” wrote BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery. “Soft landing analogies aside, global central bankers will be squarely in the spotlight in the year ahead,” they wrote.

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