The recent acceleration of the increase in government bond yields reflects investors’ worries that rising inflation will prompt the Federal Reserve to cut its stimulus earlier than the scheduled timetable. The 10-year U.S. Treasury yield once crossed the 1.5% barrier of market concern, and US stocks fell. fall. Fed officials have repeatedly emphasized that they will support economic recovery until real progress occurs. Why is the stock and bond market still alarming?
The rise in U.S. Treasury yields paused on Friday (26th). The 10-year U.S. Treasury yield fell to about 1.45%, a decline from the highest jump to more than 1.6% in the previous trading day, but Dow Jones still regained weight for the second day in a row. S&P and Nasdaq rebounded.
The bond market crash on Thursday and the stock market crashed, reminiscent of the taper tantrum in 2013. Strategists at TD Securities said that if interest rates continue to rise, the financial situation will tighten. The current real interest rate and mortgage interest rates have begun to rise. “However, we expect that the Fed will continue to alleviate the market’s concerns about the early withdrawal of stimulus, highlighting the post-epidemic period. The long-term challenges facing the world.”
Bank of America strategists also said that the rapid rise in yields on Thursday is a sign of the Fed’s massive support of the market last year, which led to a certain failure, but the Fed still believes this is a healthy situation, so it is unlikely to adjust its forward guidance.
Since the beginning of this year, the yield has continued to rise as economic growth prospects improve. Inflation expectations in the market have returned to the level before the outbreak, and the inflation-adjusted yield did not really start to rise until last week. Fed Chairman Bauer this week downplayed inflation concerns again. The rising yield is the market’s confidence in economic recovery. Signs.
However, the Fed has not even begun to think about taking back any stimuli. Columbia Threadneedle Investments analyst Ed Al-Hussainy said that when the market’s expectations of the Fed’s conversion to Eagles are truly reflected in the market, bonds will fall even heavier.
Al-Hussainy believes that perhaps the force that caused the bond market’s selling pressure this time is mainly due to investors’ desire to seek higher returns to compensate for the risks arising from the acceleration of economic growth and rising inflation in the future after the increase in fiscal expenditures, that is, bonds’ Term premium (term premium).
The bond yield is composed of a term premium and the future path of short-term interest rates. The former is the reward that investors can accept when weighing the risks of holding long and short-term bonds. Compared with short-term bonds, long-term bonds are more vulnerable to the uncertainty of economic growth and inflation.
According to data from the Federal Bank of New York, the term premium was 28 basis points on Thursday, up from -88 basis points in August last year, reflecting that the Fed’s new policy framework for “average inflation target” has achieved some results, and the policy remains high in inflation. Will not release the throttle easily before 2%.
Al-Hussainy believes that the Fed has not yet thought to curb the rise in bond yields.
Strategists at TD Securities believe that the Fed will be able to discuss the possibility of policy adjustments if the increase in government bond yields starts to hurt the economy; one of the options currently discussed is to extend the bond purchase period.
TD Securities estimates that Bauer’s talk on March 4th will alleviate market concerns.
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