Debt Market Monitor (March 2021)2 Mar 2021
Long-term bond yields are climbing, while the short end of the curve remains embedded near all-time lows. What is driving the long end of the market? A meaningful acceleration in both growth and inflation in the years ahead looks more likely now than it did a few months back. The bump up in long-term bond yields is surprising almost everyone, given that central banks have repeatedly confirmed their will to maintain short-term interest rates near zero for quite some time and material stimulus continues to be poured into economies.
As one analyst put it: “the crybabies on Wall Street started to hyperventilate when the yield on 10-year treasury bonds recently approached 1.40%, historically low but well above its recent low of 0.52% in August 2020.” The inflation-adjusted interest rate the U.S. Treasury pays to borrow 30-year term funds was negative for much of 2020, meaning the government would pay investors back less in inflation-adjusted terms than it borrowed. In late February 2021, the rate rose into positive territory for the first time since June 2020. Trade-offs are between more stimulus today and potentially higher rates and more inflation down the road, said Nathan Sheets, Chief Economist of PGIM Fixed Income and a former official at the Treasury and the Federal Reserve. Federal Reserve Chairman Jerome Powell called the surge in Treasury yields “a statement of confidence.” The upward trajectory in rates so far appears to be an optimistic sign that the post-pandemic economy will mark the end of a long period of slow growth. The Goldilocks theory will eventually apply – the balance between a “too hot” and a “too cold” economy is a challenge to get just right.