The Market Today

Longer Yields Continue Higher: Economic Data Improving, $1.9T Additional Stimulus Talk, Virus Cases Plunging, Fed Not Reactive

by Craig Dismuke, Dudley Carter


Stocks Still Struggle amid Rising Yields: A brightening global economic outlook amid an easing global pandemic has combined with pledges of ceaseless support from governments and central banks to push stock indices to their highest levels on record. However, the skyward valuations have been threatened in recent days by a jump in longer sovereign yields. Global equities continued to step backwards on Monday as investors keep watch for any signs the recent rapid increase in longer sovereign yields is abating. Excluding Japan, stocks were weaker across both Asia and Europe and tech continued to lead losses in U.S. futures. S&P 500 futures declined another 0.9% ahead of Monday’s U.S. session to a two-week low, while contracts on the Nasdaq fared even worse, sliding 1.4% by around 6:45 a.m. CT.

Rise in Global Sovereign Yields Continues Monday: The improving outlook has also led to a recovery in commodity prices and rapid increase in longer sovereign yields, as the same dynamics that initially supported equities’ record valuations also stoked inflation concerns. In Japan, the reflationary trade has pushed the 10-year government yield up to 0.115%, the furthest it has wandered above the central bank’s 0.00% peg since November 2018. The U.K.’s 10-year yield has rocketed to 0.71%, its highest level since early in the pandemic, and Germany’s has climbed to -0.32%, the highest level since last June. In the U.S., the 10-year Treasury yield has soared outside of its pandemic range and was up another 2.4 bps at 7:15 a.m. CT to 1.36%, a new high since February. The Fed’s incessant signaling they will buy bonds and hold rates low as long as necessary to aid the recovery, even as the growth outlook improves and inflation fears begin to appear, has kept shorter yields locked in at low levels. The 2-year yield remained locked in Monday near its record low, allowing the extra premium for holding a 10-year note to stretch to 124 bps, the most since March 2017.


Two Regional Fed Report:  The Chicago Fed National Activity Index beat expectations, rising from 0.41 to 0.66. As the recent volatility in the data settles, this index will likely become increasingly meaningful. The CFNAI is an aggregation of 85 different economic indicators designed to be an indicator of changes in the overall economic landscape.  For example, when the CFNAI’s three-month average is above +0.70 following an expansion, a period of more rapid inflation is expected to occur.  The 3-month average for the CFNAI is now 0.47.  At 9:30 a.m. CT, the Dallas Fed’s report on regional manufacturing activity is expected to pull back from 7.0 to 5.0.

Fedspeak: Dallas Fed Bank President Kaplan and Fed Governor Bowman are both on the calendar to speak today.  Thus far, Fed officials have yet to sound the alarm bells for the recent increase in market-based inflation expectations.


ICYMI – February 19, 2021 Weekly Market Recap: Treasury yields hit new highs for the pandemic amid further improvement in the pandemic, strong economic data, firmer-than-expected inflation readings, and indications that none of those developments had dissuaded Democrats from seeking significant new stimulus or the Fed from its pledge of patient accommodation. The 7-day average for new U.S. infections fell to 72k by Thursday, the lowest since late October, and hospitalizations and fatalities continued their declines. Preliminary PMI data indicated an easing outbreak may have led to the U.S. economy gaining momentum unexpectedly in early February. The services sector strengthened unexpectedly to its best level since March 2015 and manufacturing remained solid. But it was a 6.0% surge for core retail sales in January after a sluggish fourth quarter, the third-best month on record (behind May and June of 2020), that was the major focus. Nonetheless, Treasury Secretary Yellen pointed instead to the millions still out of work as a result of the pandemic as support for why a sizeable stimulus plan was still necessary. To that point, new jobless claims rose unexpectedly to a four-week high and were revised up in the prior week. Yet the positive developments, paired with firmer-than-expected inflation, pushed the 10-year yield up 12.8 bps on the week to 1.336%, the highest level since February 2020. With the 2-year yield essentially unchanged, the spread between the two Treasury securities widened to 1.23%, the most additional yield since March 2017. Click here to view the full recap.

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