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Steady hand of the U.S. Federal Reserve to not intervene despite spiking U.S. Treasury yields has a calming effect on markets
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All eyes on the U.S. 7-year Treasury note auction later today after the last one didn’t go so well, any sign of tepid demand may cause yields to spike and shake out markets again
If the recent spike in benchmark U.S. Treasury yields was a game of chicken, then the U.S. Federal Reserve didn’t blink.
That calm and steady hand played out well when yields pulled back in the earlier part of this week, on concerns over rising coronavirus cases and fresh lockdowns in Europe. Ultimately, the market will do what it does and the Fed has bigger fish to fry – ensuring a steady hand for economic recovery and pushing towards higher levels of employment.
During a testimony before the powerful Senate banking committee on Wednesday, U.S. Federal Reserve Chairman Jerome Powell dismissed concerns that the recent rise in long-term borrowing costs would be unhealthy for the U.S. economic recovery, countering that markets had adjusted in an “orderly” manner to the brightening economic outlook.
To be fair, the Fed can’t be expected to respond to every sudden Treasury yield spike like a jittery teenager to a pimple the night before prom.
And when the benchmark U.S. 10-year Treasury yield spiked to a 14-month high of 1.75% before pulling back to 1.63%, the Fed’s calm and steady hand (by doing nothing) was probably the best response in hindsight.
As economic conditions improve, the demand for “safe” securities like U.S. Treasuries is bound to wane, which will see yields necessarily rise – that’s the normal market in operation.
Where things will become disconcerting is when yields rise, and the market starts tanking – in other words investors are gripping on to cash for dear life – but that seems unlikely as the Biden administration is injecting some US$1.9 trillion into the system.
And a recent string of decent Treasury auctions has also helped steady the bond market, with the U.S. Treasury Department able to offload some US$61 billion of 5-year notes at a yield of 0.85%, which was just a touch higher than the initial 0.847% yield set prior to the auction – suggesting that investors are starting to buy Treasuries again.
Thursday will be crucial as the Treasury will be selling another US$62 billion worth of 7-year notes – last month’s auction didn’t do so well with demand tepid and investors will be looking out to see how this one fares.
