So much for
reassurances. Only a day after the Federal Reserve Chairman’s two-day, nothing-to-worry-about tour of Capitol Hill, financial markets suddenly found plenty to worry about on Thursday. Stocks fell sharply as the 10-year Treasury note yield had its largest one-day advance since November to its highest level in a year.
The 10-year Treasury is often called the world’s most important price, and it has moved up by some 58 basis points in about two months to a yield of 1.525%. The rapid move has caught markets by surprise. The Fed was supposed to be keeping long bond prices down for months if not years to come through its quantitative-easing bond purchases.
What does it mean? The sanguine interpretation is that bonds are merely signaling that markets are finally seeing the “sunlit uplands” of post-pandemic optimism, as British Prime Minister
likes to put it. Growth means more risk-taking, and rising rates are often associated with economic recoveries and faster growth. By any normal historical standard, a 10-year yield of 1.525% is hardly something to be alarmed about.
There’s no doubt the economy is poised for a growth boom in 2021 as the pandemic eases. Pent-up savings by consumers and pent-up animal spirits are bound to be unleashed as the vaccine rollouts spread and lockdowns end.
That was certainly Mr. Powell’s view on Tuesday as he responded to Sen. Pat Toomey’s question about rising interest rates: “if you look at what the market is looking at, what markets are looking at, it’s a reopening economy with vaccination, it’s fiscal stimulus, it’s highly accommodated monetary policy, it’s savings accumulated on people’s balance sheets. It’s the expectations of much higher corporate profits, which matters a lot for the equity markets.”
But then why would stock prices fall as bond yields rose? Perhaps it’s merely a correction for inflated equities, especially tech stocks. But the less benign explanation is that markets see a $4 trillion tsunami of U.S. debt coming as the Biden spending plan moves ahead. Perhaps they also see inflation ahead as business supply is unable to meet a post-Covid boom in demand.
We don’t know, but then we’ve also never seen the current magnitude of monetary and fiscal “stimulus” unleashed on an economy already poised for a V-shaped recovery. Let’s hope it’s all a case of momentary market jitters.
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Appeared in the February 26, 2021, print edition.
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