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Bloomberg

The treasury’s rising incomes are flashing a warning sign

(Bloomberg opinion) – The yield of US government bonds registered some remarkable movements in the first few days of 2021. If they continue at their current pace, they risk causing headaches to both policymakers and equity investors because of their major drivers. . For more than two weeks, the yield curve of the Ministry of Finance has undergone a significant increase in yields on longer-term bonds or what is known in the financial markets as ̵

6;bearish strengthening’. The yield on 10- and 30-year bonds increased by 20 basis points and 22 basis points, respectively, during this period. The spreads between these maturities and the two-year treasury account, over which Federal Reserve policy has a significant impact, have widened significantly, from 80 basis points to 98 basis points for the 10-year and from 152 basis points to 174 basis points for the 30-year. These moves come when Fed policy is constantly seeking to significantly suppress profitability and keep them in a narrow trading lane. If moves continue, they would also trigger some of the strong drivers of stocks and other risky assets, reducing their relative attractiveness and weakening buy signals issued by models that include discounting future cash flows. In addition, their persistence would be linked to the economic outlook due to their key factors and potential impact on interest rate sensitive sectors such as housing. What are these engines? Recent developments in the US yield curve do not reflect any change, real or future-oriented, in the Fed’s highly adaptable monetary policy stance. In fact, the minutes of the December meeting of the Federal Open Market Committee, published last week, confirm that the central bank does not intend to reduce its stimulus any time soon, and when it does, the process will be extremely gradual. Some of the other potential players for higher yields, such as an increased risk of government default or more favorable growth prospects, are also unlikely to play out. If nothing else, the Fed’s willingness to expand its balance sheet without restriction reinforces the perception that it has a stable and reliable non-trading buyer of government bonds. Meanwhile, growth prospects have worsened in the shadow of the recent jump in infections, hospitalizations and Covid-19-related deaths. The already monthly report on employment in the United States on Friday reported a loss of 140,000 jobs in December. The democratic scrutiny of the two run-offs for Georgia’s Senate election last week raised the prospect of higher government budget deficits and much more debt financing. But because the Fed is not only committed to maintaining its large-scale asset purchases, but is also open to increasing them and shifting most of its purchases to longer-term securities, such a prospect should not have an immediate significant impact. on profitability. then there are expectations of higher inflation and more hesitation on the part of buyers of the treasury. The first is supported by inflationary breakthroughs and other inflation-sensitive market segments. The latter is in line with the significant chatter in the market about how government bonds, which have been so heavily repressed by the Federal Reserve and face an asymmetric outlook for yield movements, are no longer ideal for risk mitigation. in the future, it will be of concern to both politicians and market risk takers. While the Fed hopes for higher inflation, it would not want this to happen through “stagflation” – that is, even more disappointing growth and higher inflation. The Fed has few tools, if any, to get the economy out of such an operating environment. This, as well as the impact on corporate profits from the lack of economic growth, would exacerbate what is already a huge gap between financial assessments and fundamentals. The most dominant view of the market at the moment and is almost universal is that stocks and other risky assets will continue to rise due to the abundant liquidity injections coming from central banks and the allocation of more private funds. After all, central banks are reluctant to soften their huge stimulus. And investors remain strongly driven by a powerful mix that has served them extremely well so far: TINA (no alternative to stocks), fueling BTD’s (buy immersion) behavior in response to even the smallest sales on the market, especially given FOMO (fear of missing the recurring impressive market rallies). As valid as these considerations are at this point in time, they also ensure close monitoring of the yield curve for US government bonds. A significant continuation of the latest trends would cause the Fed, investors and the economy. This section does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Mohamed A. El-Erian is a columnist for the Bloomberg Opinion. He is president of Queens College, Cambridge; Chief Economic Adviser at Allianz SE, the parent company of Pimco, where he was CEO and Co-IT Director; and Chairman of the Gramercy Fund Management. His books include “The Only Game in the City” and “When the Markets Clash.” For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP


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