New Order: Treasury Yields Top 1%

January 06, 2021

While the “blue wave” never materialized in the immediate aftermath of the Nov. 3 U.S. elections, two months later, Democrats have managed to complete a stunning sweep of Congress and the presidency.

After Biden defeated Trump and the Democrats maintained a small majority in the House of Representatives, expectations were that the party would fall short of capturing the Senate, leaving Washington in gridlock and stymying the bolder parts of Biden’s agenda.

But voters in Georgia had other ideas. The results of Tuesday’s runoff elections for Georgia’s two Senate seats suggest that Democrats may have prevailed in both battles. Media outlets have already called one of the races, declaring Democrat Raphael Warnock the victor over sitting Sen. Republican Kelly Loeffler.

As of this writing, the other race, between Democrat Jon Ossoff and incumbent Republican David Perdue, was too close to call, but analysts said the Democrat had the advantage. If Ossoff wins, the makeup of the Senate will be split evenly down the middle, giving incoming Vice President Kamala Harris the tiebreaking vote.

More Spending To Come

Democrats’ likely victory in the Senate is significant. It allows the party to control the bills that come to the floor, and gives them a higher likelihood of passing. Much of President-Elect Biden’s agenda would have been dead on arrival if the Republicans maintained control of the Senate; now they have a chance to become law.

The first bill that may come to pass from Democrats’ unified control is one that sends more money into the pockets of Americans. While many received $600 stimulus checks after the passage of the last COVID relief bill, Democrats were pushing for more—$2,000 checks. Additional stimulus money may go out the door soon if Democrats complete their sweep.

Biden and the Democrats have also pushed for much more spending in other areas as well. From alternative energy to infrastructure to education, the president-elect has proposed a bold agenda filled with trillions of dollars of potential spending.

Highest Yields In 10 Months

All that spending has caught the attention of one market in particular: Treasuries. As it became increasingly clear that Democrats would win, the 10-year Treasury bond yield surged above 1% for the first time in 10 months.

The yield ticked up by 10 basis points to last trade at 1.05%. At the same time, the 30-year bond yield jumped 12 basis points to 1.83%, its highest level since last February.

The iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) shed 0.7% and 2.5%, respectively (bond prices and yields move inversely).

For investors, the prospect of more spending equals a greater supply of Treasury bonds to pay for that spending. At the same time, more spending could lead to an uptick in economic growth, inflation and a Federal Reserve that begins hiking rates sooner than expected.

Indeed, the 10-year breakeven rate, a market-derived measure of expected inflation, climbed to 2.08% today, its highest level since October 2018.

10-Year Treasury Bond Yield

The Caveat

To be sure, Democrats’ victory in the Georgia Senate runoff elections doesn’t necessarily mean trillions of dollars of new spending is guaranteed to come to pass.

The party’s narrow majority—a single vote—means that bills opposed by Republicans will have to pass with unanimous agreement among Democrats. That’s a high bar, and gives moderate-to-conservative Democrats, like West Virginia’s Joe Manchin or Montana’s Jon Tester, a lot of power in setting the policy agenda.

With unanimous agreement needed, bills may be somewhat watered down in scope compared to what they may have been under a larger Democratic majority. Nevertheless, spending is almost certain to go up compared to what it would have been under Republicans’ continued control of the Senate, and the bond markets are rightfully pricing that in.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

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