The break-even inflation rate for 10-year Treasuries is showing signs of turning up again. Friday’s close (2.22%) was still two basis points below the current cyclical high, reached on February 16th.
But allied with the rise in indexed-linked yields – still negative, of course – Treasury yields are trending higher.
The 10-year yield rose last week to 1.56%, despite a strong rally on Monday.
The proximate cause for Friday’s rise in yields was the stronger payroll report (+379k). But the broader context remains Mr Powell’s refusal to stand in the way of ‘market normalisation’. Operation Twist is a non-starter and would not work anyway in the context of fiscal largesse.
Indeed, Mr Powell’s refusal to be drawn on fiscal policy – expressing ‘neutrality’ during his Congressional testimony – looks well-timed and judicious. If the US economy does approach full employment sooner rather than later, the $1.9tr fiscal stimulus may do more harm than good, crowding out high growth stocks. A bear market will loom.
Summary
• Fiscal finances very sensitive to rise in yields
• Debt dynamics, long-run concerns
• Rising yields threatens growth stocks, Tesla
