Bond yields hit their highest level since August this week, as investors bet a Democratic blue wave could bring big spending and more debt.
"I think the reality is, even though there's a pretty big knee jerk reaction here, this just delays it," said Jon Hill, senior fixed income strategist at BMP. "There is another program coming. It's just now clear it will not occur until after the election.
But 10s only fell to 0.72 or 0.73, which not too long ago was the top of the range. Even after this news, the 10-year yields are higher than where they were yesterday morning." The benchmark 10-year Treasury is the most widely watched, and it drives rates on all types of loans including mortgages. Strategists said the trend seems to be for higher yields, but yet to be seen is whether the market will continue to push rates higher on expectations for fiscal spending. If the economic data weakens and the economy looks like it will struggle without stimulus, that could drive yields lower. "We've got trillions on the table," said Greg Faranello, head of U.S. rates at AmeriVet Securities. He said he ultimately expects a roughly $1.5 trillion or more fiscal stimulus package even with a setback, and then another big package from Biden, if he wins. Faranello said $1 trillion of that fiscal stimulus spending is already included in the Congressional Budget Office's forecast for a $3.3 trillion deficit this year. Biden is expected to push for trillions for a big infrastructure package to jump start the economy as soon as he takes office, if he were to win. If the Senate also flips to a Democratic majority, that would give him immediate Congressional support to push a direct spending program. Since the debate last week, Biden has been rising in polls and betting markets. He leads by 9 percentage points in"The polling is definitely skewing toward a Biden presidency with the potential for that to trickle down to Congress. Should that be the case, there would be a fair amount of spending," said Faranello. "It's likely to be sooner rather than later." Fed Chairman Jerome Powell Tuesday called on Congress to come through with a fiscal spending package. Without more spending, he said it would "lead to a weak recovery, creating unnecessary hardship for households and businesses." Faranello said Trump could be posturing. "It's certainly not unlike Trump to step in here. He's clearly feeling better, and Treasurys rallied back but I still think we get another liquidity package and it's a matter of time now," he said. Hill said the bond market had been reacting to the idea of more stimulus but also more Treasury issuance and inflation. He said the market's tone changed last week when Biden began gaining in the polls."Everybody's concerned about a peaceful transition of power. If it's a big Biden win, it's more likely we know the outcome faster and the transition will be smoother," he said. That could boost yields since it would remove some of the flight-to-safety premium in Treasursy. Hill said the 10-year yield tested 0.72% last week, and broke it yesterday, rising through support at 0.75% to the 0.782% level, the peak after the Fed's Jackson Hole meeting. "It's rising because the market is beginning to think it will actually reach the 2%," Fed inflation target, Hill said. "That's healthy."
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