By Mark DeCambre
Yields for U.S. government debt climbed Monday, after the 10- and 30-year Treasurys last week fell to the lowest rates in months, amid market unrest fueled by the emergent omicron variant of the coronavirus that causes COVID-19.
Thus far, early reports on the new COVID strain, however, suggest that it is milder, compared against the delta variant.
What did yields do?
The 10-year Treasury note (XTUP:BX:TMUBMUSD10Y) yields rose to 1.433%, up from 1.342% at 3 p.m. Eastern on Friday, which was its lowest rate since Sept. 22. Yields for debt rise as prices fall.
The 2-year Treasury note (XTUP:BX:TMUBMUSD02Y) rate stands at 0.633%, up from 0.589% at the end of last week.
The 30-year Treasury bond’s yield (XTUP:BX:TMUBMUSD30Y) was at 1.758%, gaining from 1.675% on Friday afternoon, when it touched its lowest yield since Jan. 4.
What drove the market?
Rates rose sharply Monday as risk appetite returned on Wall Street, driving the 10- and 30-year Treasurys to their biggest one-day yield gains since Nov. 10. The 2-year, which is more sensitive to shifts in interest-rate expectations, hit its highest rate since Nov. 24, as stocks staged a powerful rally and bonds were sold.
The selling in Treasurys on Monday, driving prices down and yields higher, comes as concerns about omicron abated somewhat, after fears last week of the potential economic impact from the newly discovered variant drove yields lower, particularly on the short-end of the Treasury curve, the differential between long-dated yields and shorter-dated ones.
A narrowing of the yield curve tends to reflect concerns about the longer-term outlook for the economy as the country tries to claw back from the COVID pandemic.
A more hawkish Fed has, however, been central to swings in sentiment across Wall Street.
Fed Chairman Jerome Powell and other members of the central bank’s rate-setting committee have suggested, surprising markets, that a faster tapering of the central bank’s monthly asset purchases could be warranted to combat intensifying pricing pressures.
Concerns about the Fed making a tactical error in its newfound war against punchy inflation, which could result in the economy falling into a recession, and such a development remains one of the chief fears of investors. The Fed is currently in a media blackout until the conclusion of its two-day policy gathering on Dec. 15.
Meanwhile, the top U.S. medical adviser, Dr. Anthony Fauci, said that omicron didn’t appear to produce a “great deal of severity” in cases. Questions remain about the effectiveness of the vaccines against omicron, given the number of mutations on the variant’s spike protein, the principal target of most vaccines.
Reports from South Africa, where the strain was first identified and is becoming the dominant strain, suggest that hospitalization rates haven’t increased alarmingly, according to the Associated Press.
Markets wobbled on Friday as the November nonfarm-payrolls report showed a weaker-than-expected 210,000 jobs created in the month. The report was viewed as unlikely to knock the central bank from its more hawkish stance because it contained sufficient pockets of strength to warrant tapering, setting the stage for eventual rate hikes in 2022.
The Fed and markets will likely fixate on one last piece of data before next week’s meeting of the rate-settting Federal Open Market Committee, or FOMC. A consumer-price inflation report is due Friday that could draw Wall Street’s attention.
A rebound in oil prices may shift the near-term outlook for inflation, however, with West Texas Intermediate oil (NYM:CL.1) , the U.S. benchmark grade, rising more than 2% higher to start the week. Crude has been under pressure, amid the new variant because it is seen as a potential hit to global energy demand, driving down prices.
Oil values steadied somewhat as the Organization of the Petroleum Exporting Countries and its allies last Thursday displayed some confidence in the prospects for crude, agreeing to roll over a current production policy and raise monthly overall output by 400,000 barrels per day in January, while deciding not to adjourn a key meeting to allow for further shifts in policy if needed.
What strategists said
“Markets are in a tough spot, and not coincidental so too is the Fed. The unavoidable tightening of financial conditions with a closing window to get out. Or at least try for the Fed,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities, in a Monday note.
“The bond market is flashing warning signs. The significant flattening of the treasury yield curve tells us that investors expect real GDP growth to slow sharply next year,” wrote Joe LaVorgna, Natixis Chief Economist of the Americas, in a Monday research report. “In turn, inflation pressures should moderate. This is why yields on longer terms treasuries have declined. We hope these considerations enter FOMC discussions next week when policymakers contemplate an acceleration in asset tapering,” the economist wrote.