The Market Today

Yield Curve Continues to Steepen on Stimulus Prospects, Fed Communications

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)



Longer Yields Hit New Pandemic Highs as Optimism Keeps Pushing Equities to New Records: All eyes are on rising Treasury yields Tuesday as U.S. equities appear set to add to last Friday’s record levels in their return from a holiday break. Despite weaker economic data last week, Treasury yields and equities climbed Friday to close at new highs for the pandemic amid recovery hopes. Democrats pushed forward with stimulus plans and Fed Chair Powell reiterated his staunch disapproval of discussing an exit from easy policy (more below), even as inflation expectations reached new multi-year highs above 2.00%. Those trends have carried over the long weekend, sending futures on the major indices around 0.5% higher ahead of U.S. trading and pushing the 10-year Treasury yield up 4.4 bps to 1.25% at 7:30 a.m. CT. New domestic cases and the level of hospitalizations in the U.S. continued their swift declines over the weekend, adding to the market’s optimism. Tuesday’s level for the 10-year yield places the benchmark note above its previous pandemic high and in an area without much technical support. With the 2-year yield still held near record-low levels by the Fed’s no-hikes-soon pledge, the curve between the 2-year and 10-year notes steepened to 114 bps, or 1.14%, its widest premium since March 2017.


Empire Manufacturing Index Shows February Improvement but Raises Inflation Concerns: The New York Fed Manufacturing index rose from 3.5 to 12.1, a larger jumped than was expected.  The index portrays a broadly stronger sector for the region with improvement in the new orders, inventories, number-of-employees, and average-workweek indices.  Also encouraging, the 6-month-forward capital expenditures index jumped another 10.7 points to 28.6, its highest level in 24 months.  The data also confirms the market’s budding inflation concerns.  The prices paid subcomponent rose from 45.5 to 57.8 while prices received rose from 15.3 to 23.4. Both are now at their highest levels since 2011.

Fed Communications: Several Fed officials are on the calendar to make comments today including Governor Bowman (10;10 a.m. CT), Kansas City’s George (11:30 a.m.), Dallas’s Kaplan (12:00 noon), and San Francisco’s Daly (2:00 p.m.).


ICYMI – February 12, 2021 Weekly Market Recap: Treasury yields and equities rose last week amid the crosscurrents of weaker economic data and signs the pandemic was improving as Democrats pushed for another significant stimulus package. Yields rose early Monday as investors bet on a sizable stimulus package before pulling back midweek following weaker-than-expected updates on small business confidence and inflation. Enhancing the downward pressure on yields, Fed Chair Powell struck a dovish tone on the outlook and said talks of tapering asset purchases would occur “not any time soon.” Nonetheless, longer Treasury yields reversed higher Thursday, climbing through a worse-than-expected weekly jobless claims report and unexpected drop in consumer confidence to close at their highest levels since March. Focus remained on House Democrats drafting the text of the stimulus package, which leadership said could be voted on in a few weeks and passed by the Senate early in March, before key protections from the last bill in December expire. For the week, the 10-year yield rose 4.5 bps to 1.21% while the S&P 500 gained 1.2%. Click here to view the full recap.

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