Has the US 10-year nominal bond yield bottomed and what does the fall indicate? The answers may hold the clue for either continued reflation or maybe a risk-off episode.
For the benchmark 10-year Treasury, the yield on Friday stood at 1.35 percent, far below the high of 1.77 percent hit in March.
According to a Reuters report, earlier this year, few expected that Treasury yields would sink closer to historic lows by summer despite a resurgence of U.S. growth after the coronavirus pandemic.
Yet the Federal Reserve's hawkish shift, demand from investors in countries where domestic bonds offer flat or negative returns and the unwinding of popular short bets on Treasuries have depressed yields. This has cast doubt on the future of the so-called reflation trade.
US 10-year treasury yield
Analysts say that the top indicator for the market right now is the US 10-year treasury yield that plunged to 1.25 percent last week. This was the lowest level since February 2021. Now, over half of the 24 basis points (bps) decline in nominal bond yields since June 25 has been driven by a fall in real yields. Market expectations of inflation have not moved as much. The front-end yields have stayed higher as the market continues to price a first rate hike by the Fed in late 2022 or early 2023.
The question that needs answering is that has the fall been led by technical factors or does it indicate a slowdown as fiscal support in the US wanes and COVID cases rise around the world again?
Fed Chair Powell on Thursday
How will the Fed react to the now-lower level of real yields? Will it accelerate the discussion of tapering asset purchases? Or will the flat yield curve signal to Powell lower expectations for future growth which would argue for more dovish policy overall? Usually, one would have to wait for the FOMC for answers but Fed Chair Jerome Powell is speaking on Thursday this week. There may be some indications.Watch the accompanying video of CNBC-TV18’s Prashant Nair for more details.