GRAPHIC-Four factors that can sway bond yields in 2021
NEW YORK, Aug 27 (Reuters) – With the Federal Reserve’s central bank symposium at Jackson Hole, Wyoming, kicking off on Friday, investors are taking stock of the various factors that can influence the trajectory of Treasury yields for the rest of 2021.
Yields on the benchmark 10-year U.S. Treasury note recently stood at 1.34%, down about 40 basis points from their highs of the year.
Some banks have begun to trim their forecasts for Treasury yields in the face of data showing weaker economic growth and signs that a recent surge in inflation may be less sustainable than previously believed.
BoFA Global Research, for instance, this week trimmed its year-end forecast to 1.55% from a previous call of above 2%.
Here are some factors investors will be watching over the next few months.
A Fed taper is likely coming, but investors are still looking for details on when an unwind would begin and how quickly the central bank will pull back on the $120 billion in government bond buying that has helped buoy markets since March 2020.
None of the economists polled by Reuters earlier this month said the Fed would announce tapering at Jackson Hole. A majority of the respondents said the central bank would unveil a tapering timeline in September.
Also important is whether the central bank outlines a pre-determined schedule for tapering or announces reductions on a meeting-by-meeting basis. Paul Ashworth of Capitol Economics believes the Fed will likely choose the latter.
“Our guess is that, as happened in 2013, the majority on the FOMC won’t want to pre-commit to a specific pace of tapering or end-date,” he wrote in a recent note. “The uncertainty over the economic outlook is simply too great.”
The general thinking is that a Fed looking to taper sooner would push yields higher, especially if economic data is coming in strong, while a dovish Fed would weigh on yields.
A continued upsurge of COVID-19 cases, potentially denting economic growth, could force the Fed to delay its taper and push investors into havens like Treasuries, weighing on yields.
Daily new COVID-19 cases in the United States climbed to a six-month high earlier this month as the Delta variant ravaged several states with low vaccination rates.
The seven-day average of new reported cases reached nearly 152,500, the highest since February, Reuters data through Wednesday showed.
“Lock-downs due to the Delta variant outbreak are now impacting 60% of the population and have gone on for longer than initially expected,” BofA Global Research strategists said in a report on Thursday.
Speculators – including hedge funds – have piled into bearish bets on 30-year U.S. Treasuries as part of the so-called reflation trade, which saw investors position for higher yields and buy shares of companies that could benefit from a powerful rebound in growth.
While net speculative bets on 10-year Treasury futures are in bullish territory, those on 30-year Treasury futures remained bearish, data from the Commodity Futures Trading Commission showed last week.
A reversal in that positioning could fuel Treasury gains and drag yields lower.
Some investors worry that inflation that runs too high could force the Fed to tighten monetary policy too quickly.
Breakeven rates – the spread in the yield between a Treasury note and a Treasury Inflation Protected Security of the same duration – have remained largely steady in recent weeks after pulling back from a surge earlier this year.
“Some transitory inflation measures are moderating,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “However, necessity items like food and housing are still rising at uncomfortably high rates.”
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