False Dawn in Treasury Yields Seen With Fed Posing Risk

A familiar scenario may be about to play out in the world’s biggest debt market, with a major breakout in long-term Treasury yields at risk of faltering after a banner couple of days for bond bears.

Revived talk of potential economic stimulus, growing vaccine hopes and Federal Reserve Chair Jerome Powell’s signal of optimism for the year ahead sent 10-year Treasury yields to a roughly three-week high Wednesday, following one of the biggest daily yield spikes of 2020.

Yet rates are still only testing their post-U.S. election peak from several weeks ago, and there’s a host of obstacles to a sustained climb, beyond the fact that Congress has repeatedly failed to forge an agreement on additional relief spending.

For one thing, there’s the prospect that the Fed could swoop in as soon as this month to tamp down long-term borrowing costs to buoy the economy. Wednesday brought another measure showing U.S. labor conditions are already deteriorating, with millions of Americans still out of work. Add to that the fact that U.S. virus cases are surging and spurring fresh state restrictions, and the threat to the recovery is clear.

But economist Ed Yardeni says the key force keeping long-term yields from taking flight is that the Fed has convinced markets that it won’t allow it while the recovery remains tenuous. Some Wall Street analysts predict policy makers will adjust their bond-buying purchase program at this month’s meeting, scheduled for Dec. 15-16, by tilting Treasury purchases more toward longer maturities.

Yield on benchmark 10-year Treasury note is eyeing a return to 1%

“If it was up to economic forces and trading in sort of a free-market fashion, we probably would see the bond yield moving even higher -- to above 1%,” said Yardeni, founder of Yardeni Research Inc. “But the Fed has put more weight on employing people as opposed to worrying about inflation.”