This was the week when everyone in financial markets yielded – to the power of yields.
The continued sharp escalation of yields in key government bond markets was the dominant narrative in financial markets this week, eclipsing the COVID-19 pandemic and the peculiarities of US politics for a time at least.
Characterizing rising yields as the “dominant narrative” of the week might attribute more coherence to the market’s reaction to rising yields than it deserves; there was widespread disagreement about the causes, meaning and most desirable response to rising yields.
But the numbers are stark, and the extent of the phenomenon is indisputable.
The Financial Times reported midweek that the global bond market is suffering its worst start to a year since 2015. It ascribed the surge in yields to investors growing increasingly confident that the rollout of Covid-19 vaccines will boost economic growth and fan serious inflationary pressures for the first time in decades.
By Wednesday, the 10-year US Treasury yield, which started the year at 0.9%, jumped above 1.4% for the first time since the start of the coronavirus crisis, the FT reported, adding that European government bonds were also caught-up in Wednesday’s selling, with yields on British, French, German and Italian bonds rising.
The US 10-year yield peaked at just over 1.54% on Thursday before slipping back to the 1.50% area on Friday morning, according to MarketWatch.
US Federal Reserve Chair Jerome Powell wasn’t terribly fussed about rising yields, referring to them as a sign of confidence in the economy at semiannual congressional testimony on Tuesday.
Stock markets weren’t so sanguine. The S&P 500 Index slumped by over the course of the week as stock investors fretted that rising inflation could compel the Fed to raise interest rates and crimp the economic recovery promised by accelerating vaccination rollouts and expansive fiscal policy in the US and elsewhere.
The rising US Treasury yields may have had a more benign effect on the US dollar, which was able to gain about 0.5% over the course of the week, according to the trade-weighted DXY index.
The greenback was able to squeeze out a gain against its Northern cousin, the Canadian dollar, over the course of week. But that wasn’t before the loonie scrambled to its highest level in more than three years against the dollar on Wednesday, breaching the psychologically important level of 80 US cents before relinquishing some of the ground it gained later in the week.
Continued strength in prices for oil and other commodities this week was likely also supportive for the loonie.
Canadian yields actually rose more quickly than their US counterparts this week. The 10-year touched its highest level since January last year, peaking at 1.547% Friday morning before receding somewhat, and actually traded above its US equivalent for the first time since April during the course of the week.
The rise in US yields that began last summer has been predicated, at least to some extent, on expectations inflation will increase in response to the economic recovery gaining momentum as immunization enables economies to reopen and supportive fiscal policy adds fuel to the fire.
US Personal Consumption Expenditure data released Friday didn’t yet reflect a resurgence in inflation, with the core PCE price index rising 0.3% in January, down from 0.4% in December, and 1.5% on an annual basis. It did reveal a huge 10% increase in income in January as Americans received $600 stimulus checks from the federal government.
The pace of economic data releases quickens next week, with the Institute for Supply Management’s Manufacturing PMI out on Monday and its service-sector equivalent following on Wednesday.
Canadian and Australian GDP data for the fourth quarter will be published Tuesday, and US jobless claims will come out, as usual, on Thursday. January trade data for both the US and Canada will be released Friday, with the most consequential report of the week, the US nonfarm payrolls report for February, also scheduled for release that day.
Suggested Reading | Cambridge Market Analysis
Suggested Reading | Counterparties
■ Reuters Column: Texas blackouts expose planning failure read article
■ Project Syndicate: The Case for a Higher Minimum Wage read article
■ Government of Canada: Reflections: The potential impacts of digital technologies on the economy read article
■ MIT Technology Review: 10 Breakthrough Technologies 2021 read article
■ Vox: The US has surpassed half a million Covid-19 deaths read article
■ FT: Global government bonds hit by fresh wave of selling read article
■ Federal Reserve: Semiannual Monetary Policy Report to the Congress read article
■ New Yorker: Why Does the Pandemic Seem to Be Hitting Some Countries Harder Than Others? read article
■ NYT Opinion: To Understand This Era, You Need to Think in Systems read article
■ Bank of Canada: Canada’s labour market: rebound, recuperation and restructuring read article
Calendar for the Week Ahead
Monday, March 1
■ EUR – Markit Manufacturing PMI (Feb)
■ USD – Institute for Supply Management PMI (Feb)
Tuesday, March 2
■ EUR – Core Inflation Rate (Feb)
■ CAD – Gross Domestic Product (Q4)
■ AUD – Gross Domestic Product (Q4)
Wednesday, March 3
■ USD – Institute for Supply Management Services PMI (Feb)
Thursday, March 4
■ USD – Jobless Claims
■ USD – Fed Chair Jerome Powell Speech
Friday, March 5
■ USD – Nonfarm Payrolls (Feb)
■ USD – Balance of Trade (Jan)
■ CAD – Merchandise Trade (Jan)
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