What affects the ten-year U.S. government bond yields
The pandemic and related problems at home have taken a serious toll on the U.S. economy. And negative processes appeared in many segments, even those previously considered quite stable. However, despite many difficulties, the economy is gradually recovering, as evidenced by positive trends from various sectors. ING strategist Antoine Bouvet notes that ten-year bond yields have risen. It is expected that by the end of the year it will reach 2%, which is a good sign.
One of the reasons for such growth the expert calls the vaccination program. He notes that during 2021 most of the population will be vaccinated against coronavirus, and then it will be possible to remove a number of restrictions that will have a positive impact on the development of the American market.
Against the background of government stimulus measures, experts expect retail sales to grow. This, in turn, contributes to optimistic moods in the market, which will soon lead to a sharp increase in the yield of Treasury government bonds. The minimum rate for these securities will be 2%, but possibly higher. Since the beginning of the year, the 10-year U.S. bond yield has risen to 1.6%. Such a jump is indicative of rising inflationary expectations. In addition, there is a probability that a new government stimulus in the amount of $1.9 trillion will significantly strengthen the dynamics of economic recovery, which will inevitably lead to a sharp increase in prices.
Antoine Bouvet predicts an increase in inflation by the end of the current quarter, the analyst calls the peak value of 3.5%, but it is not excluded even higher. In this case, such an increase will be temporary, which should still attract the attention of the Fed and change their policy on a number of issues. The average inflation rate by the end of the year will be 2.9% and similar figures will remain in the future.
The rise in government bond yields could signal two factors – a decline in demand for the securities and an increase in inflation expectations, which are more realistic in this case. Both lead to a decrease in the value of treasury bonds.
It should be noted that these securities are an investment with minimal risk, which is ensured by the guarantee from the state. The increase of rates on them is connected with the dynamics on the market, and the competitiveness of bonds grows in comparison with stocks. It is worth considering the factors that can reduce the demand for securities. The largest buyer of U.S. government bonds is China, and if the countries again come to an open confrontation, then the volume of securities purchase will fall.
