The US 10-year treasury yield has risen to 1.12 per cent recently. This is the highest level since March 2020. The yield has more than doubled from 0.5 per cent in August 2020. Yet, it is below 1.90 per cent, seen just before the pandemic.
Why is the yield rising?
The rise is influenced by record borrowing programme of the US government this year after country’s fiscal deficit rose to 15 per cent of GDP last year, highest since 1945.
More importantly, rising yields depict improving prospects of US recovery and brightening inflation expectations. Record amount of monetary and fiscal stimulus in 2020 helped healing the economy over last nine months. Few sectors such as automobile, housing, manufacturing, etc saw quick rebound, while few others such as travelling, dine-out, etc lagged. Overall, economic activities are normalising in the US. GDP is expected to register a positive growth in the current quarter.
Analysts believe that vaccination could cover most Americans by mid-2021. This might pave way for freer movement of people and could normalise retail spending. Retail spending constitutes at 70 per cent of US GDP. Further, likelihood of another round of cash hand-out, under Biden administration, should help speeding recovery in the second half.
No surprise that Goldman Sachs upgraded growth forecast for US to 6.4 per cent in 2021. This will more than offset 3.6 per cent contraction expected in 2020.
US Dollar and metals
Generally, rising yields are signs of economic growth and are positive for asset markets. Financial markets, including metals, have typically risen together with yields.
However, excessive money supply, in form of QE, have made financial markets front-run the economic rebound by good margin. This has built-up speculative premium in several pockets, including in metals. This “froth” could diminish as US long-term yields rise.
Also, rising US yields could make US assets attractive for investors. This might slowdown the flow of money into emerging markets and US Dollar might recoup its losses. The history of US Dollar between 2009 and 2019 also support the case of a possible rebound in this year.
Metals, that hold a negative link with US Dollar, might give up some of the “excessive” gains accordingly.
The danger mark
Despite the recent rise, US yields are far below the levels seen at the current stage of economic recovery. This is because of US Central bank’s reluctance to raise rates or anytime soon. However, if US recovery surprises this year, US central bank may nudge closer to tapering QE.
Trend in US yields is showing that the “temperature” is rising. This might be worrying the bulls but there is no need for them to panic yet. In my assessment, 10Y yield above 1.50 per cent could possibly the danger mark that might bring sell-off across asset markets.
In any case, the incessant rally in metals of 2020 needs a break. Whether rising US yields could trigger it in the coming months? Chances seem high.
The writer is Founder, CEO of Metal Intelligence Centre (MIC), an information hub for metals. Views are personal