US government bonds wavered on Wednesday ahead of US president Joe Biden revealing the next stage of his multitrillion-dollar fiscal stimulus in a move that could cause more ructions in the previously sedate sovereign debt market.
The yield on the benchmark 10-year Treasury, which sets the tone for borrowing costs worldwide, was steady at slightly more than 1.72 per cent. This follows a quarter of heavy selling that sent its yield racing up from about 0.9 per cent at the start of the year.
Biden is expected to reveal on Wednesday broad economic recovery proposals centred on infrastructure. Analysts expect the plan to carry a price tag of trillions of dollars, following the $1.9tn coronavirus relief bill already announced.
“What we are all waiting to find out is how it will be paid for,” said Remi Olu-Pitan, multi-asset fund manager at Schroders.
A bias towards borrowing over taxation could cause further volatility in US bond markets, she added, in a trend shaking up the traditional use of Treasuries as low-risk assets that cushion investment portfolios from stock market shocks.
“Government bonds have moved from being the risk-free and stable return asset to one that is return-free and risky,” she said. “With fiscal stimulus being used increasingly to heal the effects of the pandemic, I think this could be the theme for the next decade.”
The move in Treasury yields since the start of this year, as investors anticipated higher inflation as well as extra state borrowing, marks one of the most brutal sell-offs of US government bonds during the 21st century. The 10-year yield climbed 0.85 percentage points in the final three months of 2016, when Donald Trump won the US presidential election. It also rose 0.87 percentage points in the second quarter of 2009, strategists at Deutsche Bank calculated.
“Bond yields are going up for good reasons, because of a better economic outlook,” said Kevin Thozet, a member of the investment committee at Carmignac. The French investment manager’s flagship multi-asset fund was now positioned for further falls in government bond prices and higher inflation, he added. “Can these traditional safe assets be used as such at the moment? Well, not really,” he said. “We are implementing some negative strategies [towards them].”
In stock markets, Wall Street bourses opened higher after data from payroll processor ADP showed US private sector employment for March had increased by the most in six months. The blue-chip S&P 500 gained 0.4 per cent and the technology-focused Nasdaq Composite rose 1 per cent.
Europe’s Stoxx 600 index traded flat, close to its highest level since the start of the pandemic. The region-wide benchmark has risen almost 8 per cent this quarter, pushed higher by banks and industrial businesses that will benefit from a global economic recovery. The UK’s FTSE 100 fell 0.1 per cent.
In currencies, the dollar was little changed against a basket of its peers, remaining near its highest since November. The euro added 0.2 per cent to purchase $1.17 and sterling gained 0.3 per cent at $1.378.