US: Extremes

Hitting 1.5% for the 10yr Treasury is a big deal. Last year, many had debated whether we could even get above 1%. It now looks like 2% is the new 1%. Part of the reason for the rise in long yields is they are unprotected by the Fed's easy policy, which in turn is pushing short rates ever lower. Risk assets are in the mix too, inversely related to bond yields, but also getting fed by excess liquidity. Expect more volatility.

Big moves under big pressure - Long rates stretch higher and short rates head lower

It's not often we get moves like we've seen in US rates in recent weeks, as both ends of the curve gets stretched in quite a dramatic fashion.

The backstory here is twofold. First, a good news story on recovery, largely driven by the US – an outsized spurt in growth and inflation is practically guaranteed for 2021, and in an accelerated manner. A sense of post-pandemic euphoria will be part of this in the second half of the year.

Second, a decent chunk of the kudos for the positive outlook is attributed to the official sector, and the Federal Reserve remains fully engaged with a monetary policy stance that is in full-on easing mode. In fact, it remains remarkably loose – zero rates, "practically guaranteed" for the next year or so, and an ongoing $120bn of bond buying per month.

The latter is important. It injects liquidity directly into the system. It's big too. Remember when the Fed announced its last taper of bond buying in late 2013, it was doing lower volumes, of $85bn per month.

Fed bond buying also encourages investors to buy out the credit curve, as recipients of cash reinvest in other, typically more risky, product. In other words, the Fed buying program not just injects liquidity, but also encourages risk-taking, which in turn supports credit markets. It's not the driver of tight credit spread, but it helps.

These are all interconnected, and there is a clear transmission to higher long end rates here too, as the reflation story gains in credibility. But the front end is where it is all brewing, where there is catch-all evidence of a very easy monetary stance.

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