Treasury Yields are soaring, should be good for the financial sector

Treasury Yields Have Soared This Week. What Investors Should Expect Now. -- Barrons.com DOW JONES & COMPANY, INC. 2:21 PM ET 12/2/2020 Symbol Last Price Change BAC 29.075 +0.385 (+1.3419%) QUOTES AS OF 02:39:58 PM ET 12/02/2020

 

Long-term Treasury yields have kicked off the month of December with a steep jump.

The benchmark 10-year U.S. Treasury yield had climbed to 0.95% by Wednesday afternoon, nearing (but not yet reaching) its highest levels this year and extending a move that started Tuesday. That day, the benchmark yield jumped to 0.92% from Monday's 0.84%, the biggest single-day increase since early November, when Pfizer announced a higher-than-expected efficacy rate for its Covid-19 vaccine. The 30-year yield has climbed to 1.70% from 1.58% on Monday.

Treasury prices decline when yields rise -- so the iShares 20+ Year Treasury Bond exchange-traded fund (TLT) is down 2.5% this week, following a 1.6% Monday decline. The S&P 500 has risen about 0.7% this week.

The speed of the move in Treasury yields has been puzzling, as the renewed spread of Covid-19 raises concerns about health-care systems getting overwhelmed and potentially forcing shutdowns.

But it fits with a broader trend: Long-term Treasury yields moved noticeably higher in early November and have traded around those levels since. That is because investors expect some stimulus to be passed by Congress, whether this year or next; the Federal Reserve hasn't started buying more longer-maturity Treasuries; and vaccine developments give the impression that a growth rebound could be in store next year. What's more, investors now doubt that the market can provide as much protection against stock-market selloffs as it has historically.

And positive economic trends may further boost Treasury yields next year, according to Wall Street strategists.

In a Dec. 1 presentation, Bank of America(BAC) strategists forecast that the 10-year U.S. Treasury yield could rise to 1% in the first quarter of 2021, and then keep climbing to 1.5% by the end of next year.

The Fed is "firmly stuck in reflationary mode," the bank's strategists said, as central-bank officials expect to keep interest rates near zero until 2023. And the news of vaccine developments supports a "baseline scenario of gradual economic recovery."

The Treasury Department is also expected to sell more long-term bonds while interest rates are at zero, to lock in low interest costs for decades. And an increasing supply of long-term Treasuries means marginally lower prices (and higher yields).

"Fed demand has been the whole story this year, but the central bank won't keep pace with Treasury supply," wrote Oliver Brennan, senior macro strategist with TS Lombard, in a Dec 2 note. "Yields will rise before the Fed twists [to longer-term purchases] again."

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com