Traders are looking at stock prices on the 25th (local time), when major indexes on the New York Stock Market plummeted in the aftermath of a surge in US Treasury yields. The recent economic recovery is expected to accelerate, and US Treasury yields are soaring rapidly. /AP Yonhap News
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From the 26th (local time) in New York City, the number of people allowed for indoor business at all restaurants has increased to 35% of the maximum. It has been only two weeks since it allowed the business to resume with a 25% limit on the 12th. This is because the fear of the novel coronavirus infection (Corona 19) has greatly decreased.
The US economy is rapidly reviving with a large-scale vaccine for COVID-19. Consumption and employment indicators as well as corporate performance are improving remarkably. There are many analyzes that the recent surge in government bond yields is because expectations for economic normalization are reflected at once.
The US Department of Labor announced on the 25th that last week there were 730,000 claims for unemployment benefits. This is the lowest since the end of November last year. Compared to a week ago, 111,000 cases decreased. It was far below the expert estimate (845,000 cases) compiled by the Wall Street Journal.
On this day, the Ministry of Commerce raised the economic growth rate for the fourth quarter of last year to 4.1% (annually), 0.1 percentage points higher than the preliminary value released last month. Durable goods orders in January of this year increased 3.4% from the previous year. The growth rate greatly exceeded the market forecast (1.0%).
In the fourth quarter of last year (first quarter of fiscal year 2021), corporate earnings were unexpectedly strong. As a result of a full survey of S&P500 listed companies, which had been disclosed by Yadeni Research, an investment advisory firm, the proportion of’earning surprises’ reached 80.6%.
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It is analyzed that the confidence that COVID-19 can be controlled soon lies in the background of the US economic recovery. According to Johns Hopkins University, the number of confirmed cases per day in the United States decreased by 62% from the previous month until the 20th. The number of deaths per day, which has exceeded 3,000 since last month, has declined to the level of the early and mid-2000s this month. “It has been confirmed that the best stimulus is a vaccine,” said Son Sung-won, a professor at Loyola Mary Mount University. “From the third quarter of this year, it will slightly exceed the trajectory of the economy before Corona 19.”
As the prospect of an economic recovery accelerated, the 10-year Treasury bond yield on this day ended at 1.54% per annum, which surged 16bp (1bp = 0.01% point) from the previous day. This is the highest figure in more than a year since February 19th (1.56% per year) last year.
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Treasury bond yields exceed stock dividend yield… Potential fluctuations in the global money market
On the 24th, the founder of Tom Essay of Seven’s Report Research, an investment advisory firm in the United States, warned on the 24th that “the interest rate of 10-year US Treasury bonds could exceed 1.6% per year within a few weeks.” The upward pressure on Treasury yields is very strong. However, the Treasury bond rate peaked at 1.614% per annum on the 25th, a single day, and ended at 1.54%. Jim Caron, portfolio manager Morgan Stanley, said, “The interest rate for 10-year Treasury bonds expected in the market at the end of this year was 1.5% per year.”
Mayor who didn’t believe Powell’s remarks
Ironically, there are many analyzes that the recent surge in government bond yields is an expectation for an economic recovery. As the US economy showed signs of recovery, the outlook for inflation (increased inflation) spread and yields jumped mainly on long-term government bonds. The 10-year Treasury bond rate was only 0.9% per year at the beginning of this year.
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Fed Chairman Jerome Powell attended a hearing in the House of Representatives and said, “It will take more than three years to reach the 2.0% inflation target,” but the market did not immediately believe. He believes that the rate of inflation could be faster than expected if the economy normalized. Markets are concerned that if that happens, the Fed will taper early (reduce asset purchases).
The retail sales announced by the Ministry of Commerce on the 17th were also highlighted. Last month, retail sales increased 5.3% from the previous month, far exceeding the expert’s estimate (1.1%). It is also a rebound in four months since last September.
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Expectations for the February unemployment rate, which will come out on the 5th of next month, are also growing. The US unemployment rate reached 14.8% in April last year, but dropped to 6.3% last month. Although the Fed has been concerned about the weak employment situation, it cannot be ruled out that the employment indicators may have improved. “There is no doubt that we can achieve a growth rate of 6% this year,” said John Williams, governor of the Federal Bank of New York. If the 6% growth rate is realized, it will reach the highest level after 1984 (7.2%).
Super stimulus plan is also waiting for additional vaccine supply
The expectation that the Johnson & Johnson (J&J) vaccine, called a’game changer’, will be distributed sooner or later is also a factor raising expectations for economic normalization. As the US Food and Drug Administration (FDA) has already recognized the preventive effect and safety of the J&J vaccine, it is expected that official approval for use will be issued on the 27th.
The J&J vaccine showed a 72% preventive effect in US clinical trials. The effect on the severity of Corona 19 is higher at 86%. This means that if you get this vaccine, your chances of being hospitalized or killed from Corona 19 are significantly lower. In fact, no one died from getting this vaccine during clinical trials, and a single dose can form antibodies. It can be stored for at least 3 months at normal refrigeration temperature, so it is optimized for mass distribution. J&J plans to supply 100 million doses of vaccine to the United States by the end of June.
It is highly likely that the’super stimulus plan’ worth $1.9 trillion will be implemented in the early and mid next month. This is because the proposal to raise the minimum wage, which was controversial even inside the Democratic Party, was removed from the final stimulus law. There are many prospects that the stimulus law will be passed by the Senate early next month without much disagreement. Experts diagnosed that expanding the spread of vaccines and implementing additional stimulus measures will play a decisive role in accelerating the economic recovery.
Assets move from stocks to bonds
As government bond yields rise, global liquidity is raising the possibility of shifting from risky assets such as stocks to bonds. This is because if the benchmark 10-year Treasury bond yield exceeds 1.5% per year, the average dividend yield of stocks will be exceeded. As of last year, the dividend yield of the S&P500 index was about 1.48% per year. S&P Dow Jones Senior Analyst Howard Silverblatt said, “U.S. Treasury bonds are not only a safe asset, but are also attractive to investment,” he said. “Relatively, all stocks are at risk.”
However, there are some views that the recent surge in government bond yields will only be temporary. Daniel Ivasin, Chief Investment Officer (CIO) of Pimco, a global bond management company, said, “The economic recovery will be strong, but concerns about inflation will only be temporary.” I said.
“Even if the economic outlook has changed optimistically, it doesn’t mean that inflation will come close to the Fed target (2.0%) anytime soon.”
New York = Correspondent Jae-gil Cho [email protected]
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