US long-term interest rates hit highest level in a year on stimulus impact

Long-term US bond yields have struck their highest level in a year in the latest sign that investors expect President Joe Biden’s stimulus plan will boost US economic growth and eventually lead to higher levels of inflation.

In early New York dealings, the 30-year Treasury yield traded at 1.99 per cent, having earlier climbed above 2 per cent for the first time since last February. It has risen around 0.36 percentage points since the end of last year. 

The rise in yield, which reflects a decline in price of US government debt, comes as the Biden administration lobbies lawmakers in Congress to pass a sprawling $1.9tn stimulus package. The injection would follow a $900bn package passed late last year and a $3tn scheme at the start of the pandemic. 

Some economists and investors are concerned that the massive fiscal push, combined with the unprecedented monetary policy measures launched during the crisis by the Federal Reserve, will fuel a significant rise in inflation. 

“For me it will be hard not to see inflation in something when we get what is likely to be a short-term stimulus boost,” said Jim Reid, analyst at Deutsche Bank. “Whether that will be in goods, wages or asset prices (or all three) remains to be seen but it seems inevitable there will be an impact.”

A key measure of market inflation expectations, known as the 10-year break-even rate, rose to 2.2 per cent on Monday — the highest level since 2014, according to Bloomberg data.

Still, an underlying barometer of consumer price inflation that excludes food and energy costs rose at an annual pace of just 1.6 per cent in December, according to government statistics. 

Larry Summers, who served as Bill Clinton’s Treasury secretary, warned last week that Biden’s plan might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.

Janet Yellen, US Treasury secretary, pushed back on these concerns in a television interview at the weekend, saying American policymakers should focus on shoring up the labour market. 

“I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises,” she said. 

Expectations that the vaccine rollout, combined with economic stimulus measures, will help lift the US economy have pushed longer-term rates up more quickly than their shorter-term counterparts. The so-called yield curve, which measures this difference in yields, last week hit its steepest since 2015. 

Line chart of 10-year breakeven rate (%) showing US inflation expectations rise

This trend was due to “positive news around the pandemic, some better-than-anticipated economic data, and increased fiscal stimulus expectation”, JPMorgan analysts said on Friday.

The Wall Street investment bank had been anticipating Congress would eventually agree a $900bn stimulus bill, but said recent manoeuvring in the Senate suggested the package could be larger than it had anticipated. 

“It stands to reason that if Congress were to pass a larger package it would raise growth expectations, resulting in higher Treasury yields than our baseline forecasts,” the bank added.

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