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The contests will determine control of the Senate for the next two years. Many believe a Democrat-controlled Senate could make it easier for lawmakers to push through a bigger stimulus. More government spending could lead to higher inflation, which would drive yields higher.
“It’s almost like the market is just relieved we are getting to a conclusion and yields are forming a higher range. Investors are betting more deficits, more spending and more Treasury issuance if Democrats gain control of Senate,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities. “Now that the 10-year broke 1%, we are going to spend some time in the 1% to 1.20% range.”
Earlier this week, the breakeven rate for 10-year inflation expectations touched 2% for the first time in more than two years.
It has been a sluggish rebound for the 10-year rate, which tumbled to a record low of 0.318% in March amid a historic flight to safe assets in the depth of the pandemic. With the unprecedented monetary and fiscal stimulus, bond yields have gradually trended higher but the persisting Covid uncertainty and uneven economic data have kept rates’ recovery bumpy.
Earlier this week, bond yields got a boost from stronger-than-expected economic data.
An index of U.S. manufacturing activity rebounded to a reading of 60.7 last month, the highest level since August 2018, according to the Institute for Supply Management. Economists polled by Dow Jones had forecast the index falling to 57.0 in December.
Tom Essaye, founder of Sevens Report, said the breakout in yields shouldn’t put pressure on risk assets in the short term.
“That wouldn’t be a direct headwind on stocks, but it would reinforce that rising yields is a theme that we need to watch closely in 2021, Essaye said Tuesday.
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