US 10-year treasury yields enjoy biggest monthly jump since 2009

Posted on November 30, 2016

Trumped up.

US 10-year treasury yields have enjoyed their biggest climb since the depths of the financial crisis this month, as the prospect of bumper spending and radical tax cuts under the president-elect Trump have led to soaring inflation expectations.

Benchmark treasury yields have climbed 55 basis points to 2.38 per cent this month – their highest level since June 2015 and biggest monthly climb since December 2009.

Yields have accelerated in the wake of Donald Trump’s election, getting another kick higher today as the Republican’s likely new treasury secretary has hinted at implementing the biggest tax cuts since the Reagan era under the new administration.

A shift towards stimulative fiscal policy – with Mr Trump promising higher infrastructure spending and larger government deficits – has led bond investors to dramatically shift their outlook for future US inflation. Inflation erodes expected returns for investors, who demand a higher premium for holding longer term debt.

The 30-year US treasury yield has also shot up an impressive 46 basis points in November to above 3 per cent for the first time since December last year (yields fall when a bond’s price rises).

Larger prospective government deficits, coupled with impressive unemployment rates and still healthy GDP growth, mean markets are placing a 100 per cent implied probability on the Federal Reserve raising interest rates next month. It will be the Fed’s second rate rise in 12 months, with tighter monetary policy adding further pressure on US bond prices.

But “Trumpflation” advocates beware. Higher yields will also raise the servicing costs on the US government’s 77 per cent of debt-to-GDP pile, warn analysts at HSBC.

Given the current upward trend in yields, 10-year treasury’s are set to average above 3 per cent in four years time, notes Steven Major at HSBC, who warns this will lead to a severe rise in debt servicing costs faced by Washington.

“It would not take much for yields to become so high that they start to pinch the economy”, said Mr Major, head of fixed income at the bank.

“If forward rates moved towards 3.5 per cent, our analysis suggests servicing costs would rise to a dangerous 10 per cent of GDP. Given high debt levels, it would take a much lower rate of interest than in the past for total servicing costs to rise”.

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