• 10-year yield at 1.54% is up 70% this year, 300% in seven months.
  • Economic growth and inflation prospects driving credit markets.
  • Federal Reserve expects temporary inflation and unaffected economic expansion.
  • Yield on the 10-year Treasury remains at extreme low of historical range.
  • Dollar is riding the yield surge, both are headed higher.

After almost a year in the pandemic dungeon, Treasury yields have a qualified parole.

The 10-year Treasury reached 1.613% on Monday its highest since last March before closing just below 1.6%.

Market expectations are high for a burst of US economic growth in the first half of the year. The first signs of inflation are visible and conditions seem ripe for its return. The Federal Reserve has signaled that, at least for the time being and at current levels, it is not concerned that rising interest rates will choke off growth. Enormous US federal deficits, including the latest $1.9 trillion spending package, funded entirely by debt, have placed an unprecedented amount of issuance into the global financial system.

All these are indications that Treasury rates, except for the short end of the curve, pinned by the Fed, will continue to move higher.

10-year Treasury auction

Into that mix Wednesday's auction of 10-year bonds could put a seal on the direction for interest rates and on the willingness of investors to absorb the burgeoning American debt.

The chief question is for the major financial institutions that participate in Treasury auctions. Are yields sufficient given the risks inherent in the economy? With $414 billion of Treasury supply in March, almost twice the previous record, the answer will determine the immediate future for bond prices and rates. Treasury prices move inversely to yield.

Until last month markets had taken in the proceeds of several large auctions without driving rates appreciably higher.

But the 7-year note auction on February 25 had the worst participation since the US Treasury reintroduced the debenture in 2009. The highest return of 1.212%, tailed by 4.2 basis points, was the worst in the auction's history. The tail is the term for the gap between the yield before the auction and the highest return resulting from the auction.

Immediately after that auction the 10-year yield broke above 1.6% in intra-day pricing for the first time since last February.

US economic growth

The US economy, freed from pandemic restrictions and fostered by massive fiscal stimulus and individual grants, is expected to explode into expansion in the first and second quarters.

Payrolls have resumed growth, adding 166,000 jobs in January and 379,000 in February.

Consumers signaled their potential cooperation with a 5.3% burst of spending in January Retail Sales. The ostensible reason was the $600 stipend in the December stimulus package but that was likely enabled by declining pandemic cases and the reviving job market.

February Retail Sales are due on March 16 and are forecast to slip 0.4%. If spending is positive, it will be another sign that the US consumer is ready to fund the expansion.

The current Atlanta Fed GDPNow estimate for first quarter annualized GDP is 8.4%. The next update is after February Retail Sales.

Finally, even Fed Chairman Jerome Powell noted in Congressional testimony that the economy might expand at 6% this year.

Inflation

The Producer Price Index jumped 1.3% in January driving the annual rate to 1.7% from 0.8% in December. Monetary conditions at their most accommodative since the financial crisis. The Federal Reserve rate projections have the fed fund at its current 0.25% upper target through the end of 2023. Annual multi-trillion dollar federal deficits have placed more money into the economy than at any time in US history. Gasoline prices have also risen sharply, 34% to $2.68 from November 9 to March 8.

Overhanging unemployment should deter immediate wage increases but that could well change by the third or fourth quarter particularly in specific fields like construction where demand for homes is running above housing bubble levels. Demand for consumer goods coming against supply constrictions lingering from the pandemic might also push prices higher.

While price increases have not yet shown in the Consumer Price Index which was 1.4% on the year in January, it is expected to climb to 1.7% in February.

Federal Reserve

Chairman Jerome Powell has said that the bank expects any rise in inflation to be temporary, a product of the base effect from the collapse of prices in the spring.

Inflation averaging, the Fed's new price management policy intends to tolerate gains above target for periods long enough to produce the 2% average. Since core PCE inflation has only rarely been above target in the past decade the FOMC can obviate a potential inflation trigger simply by lengthening the averaging period.

Interest rates, specifically the benchmark 10-year yield are at the extreme lower end of their historical range. The all-time low was just over six months ago on August 4 at 0.515%.

That is likely the source of Mr Powell's expressed confidence that the US economy can tolerate an orderly ascent of rates without sacrificing economic growth.

A final piece of logic may help to define the Fed's seeming insouciance in the face of rapidly rising Treasury and commercial rates.

The Fed is committed to providing maximum support to the economic recovery and to keeping the short end of the yield curve and the fed funds rate low as long as necessary to achieve that goal. Yet the governors know the conditions for inflation are quickly amassing. By letting the longer side of the curve rise the governors can hopefully brake any inflationary expectations without surrendering their promises.

Conclusion

Rising interest rates in the US are an economic function. The credit markets are responding to modest improvements in economic data and to the enormous potential for US expansion this year. The signs of the gathering rush are plentiful.

The recovery of the American economy and employment will not be deterred by 10-year rates rising toward 2%. Traders and investors know this. The equity, credit  and currencies markets have already rendered their judgment.

Higher interest rates are a sign of economic health.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD falls below 1.0500 after US NFP data

EUR/USD falls below 1.0500 after US NFP data

EUR/USD dropped below 1.0450 but managed to stage a modest rebound. The US Dollar preserves its strength against its rivals and doesn't allow the pair to gain traction after the data from the US showed that Nonfarm Payrolls rose by 263,000 in November.

EUR/USD News

GBP/USD turns south on upbeat US jobs report, trades below 1.2200

GBP/USD turns south on upbeat US jobs report, trades below 1.2200

GBP/USD lost nearly 100 pips with the immediate reaction to the upbeat November jobs report from the US and broke below 1.2200. The US Dollar Index clings to strong daily gains above 105.00 after the data showed that Nonfarm Payrolls rose by 263,000.

GBPUSD News

Gold retreats below $1,790 as US yields surge on US NFP

Gold retreats below $1,790 as US yields surge on US NFP

Gold price turned south and dropped below $1,790 in the early American session. The benchmark 10-year US Treasury bond yield is up more than 2% on the day near 3.6% after the bigger-than-expected November job growth, weighing heavily on XAU/USD.

Gold News

FTX exchange collapse, loss of $3.1 billion could have been avoided on one condition

FTX exchange collapse, loss of $3.1 billion could have been avoided on one condition

FTX exchange, founded by Samuel Bankman-Fried (SBF), has consistently made headlines over the past month for its liquidity crisis and triggering a collapse in the crypto ecosystem.

Read more

AMC advances more than 3% in premarket day after being halted

AMC advances more than 3% in premarket day after being halted

AMC stock is up 3.4% in Friday's premarket just a day after authorities halted trading due to unusual volatility. Thursday saw options volume three times higher than the 20-day average.

Read more

Majors

Cryptocurrencies

Signatures