Treasury yields started the new year on Monday, after the rate on the 10-year note saw its biggest annual increase since 2013 as investors await growth on inflation and the Federal Reserve’s policy response.
What is the produce doing?
What is driving the market?
Yields rose in 2021 as investors gauged an increase in inflation, fueled by strong consumer demand and supply-chain constraints, which proved stronger and more persistent than central bank policymakers expected.
The Federal Reserve began rolling back monthly asset purchases in late 2021, accelerating the wind at its policy meeting last month. The Fed is set to end monthly purchases in March, with investors raising rates starting in the spring.
The yield curve, a line tracking yield across all Treasury maturities, flattened significantly in 2021. The spread between the 10-year and 2-year Treasury yields narrowed by more than 160 basis points, or 1.6 percentage points, in March of last year. Less than 79 basis points by the end of the year, according to FactSet. A flattening curve can be a sign that investors fear central bankers may proceed too aggressively, crippling the economy.
Investors were also assessing the continued rise in COVID-19 cases driven by the Omicron version of the coronavirus that causes the disease. In the past week, the average number of new US cases has topped 400,000 for the first time, up more than 200% in the past 14 days, According to the New York Times Tracker, There has been a 3% drop in deaths over the same period.
The government’s top infectious disease doctor, Dr. Anthony Fauci, said on Sunday that the focus should be on the number of hospitalizations, which could overwhelm health systems, rather than new infections. Many infections are mild or asymptomatic and scientists believe that the Omicron type, while more contagious, may be less virulent than other types. But there are other variants circulating as well.
In addition, the risk of serious disease from any circulating version, including Omicron, is too high, without vaccination, Fauci warned last week.
The economic calendar on Monday includes the final Market Manufacturing Purchasing Managers’ Index reading for December at 9:45 a.m., while the November construction spending data is at 10 a.m. Eastern. December jobs figures will be this week’s data highlight, with official data on Friday.
What are analysts saying?
“The 10s-2s spread ended 2021 at 78 basis points. As we begin 2022, the 10s-2s spread is more important than the absolute level of the 10-year yield, as it will remain our ‘real-time’ indicator of whether markets think the Fed is removing stimulus too early “Sevens Reports Research founder Tom Essay said in a Monday note.
A break below the spread’s recent low of 73 basis points “would be a negative technical signal and we expect further downside in 10s-2s which could put pressure on stocks,” the essay wrote. “Instead, we’d like to see a 10s-2s spread back toward 1% and signal that while the Fed is removing housing, the market isn’t worried about it hitting the recovery.”