Bonds remain under pressure as talk of more stimulus package to revitalize a struggling U.S economy continues to gather pace. The yield curve is steepening as investors await big borrowing under the Democrat’s regime, who now control both houses.
The U.S 10-year debt is up by more than ten basis points for the year, with the spread between the two-year and ten-year yield widening by more than 100 basis points. This is the first time in more than three years that the spread has widened with such a margin.
The ten-year treasury yield is fresh from paring an advance and finishing Flat on the second day of trading in the second week of the year. The Treasury note closed at 1.13% after initially rising to 1.18%, the highest level since March 2020.
The 30-year Treasury bond also remains flat at 1.88% as the long maturity rate climbed to 1.90%. The recent spikes in yields follow a successful $38 billion auction of 10-year notes, which cleared at 1.16% compared to an opening range of 0.78%.
Record Low Interest Rates
However, the bond market’s long-term outlook looks bearish as interest rates remain at record lows. Interest rates are only expected to rise on the economy bouncing back from the shocks triggered by the pandemic. With cases of COVID-19 infection and deaths rising, there is no glimmer of hope for a raise any time soon.
The huge sell-off in the bond market comes amid talk that the Federal Reserve is far off from raising interest rates. Amid the pandemic toll, the prospects of a rate hike have been pushed to 2023. Likewise, interest-bearing securities look set to remain under pressure given the record-low interest rate environment.
Vanguard Bond Sell-Off
Vanguard Long Term Corporate Bond ETF is one of the bonds feeling pressure in the bond market. The bond has already plunged to the oversold territory after tanking to as low as $107.30 a share. The Bond’s relative strength index has already hit lows of 29.3 affirming increased selling pressure. In contrast, the RSI reading of the S&P 500 is currently at highs of 67.4.
The huge and sudden sell-off in the bond market continues to support equities while also tapping brakes on short dollar positions. Equities have benefited a great deal from the record-low interest rate environment in recent months.
However, equities have also come under pressure in recent days owing to the ever-growing risk of the COVID-19 pandemic. With the U.S struggling amid a ferocious second wave, there is growing concern that the pandemic might have affected the company’s earnings heading into the earning session.
Stocks have taken a breather for the second day in a row as the coronavirus pandemic continues to give a pause. Fuelling sell-off in the equity market is the political turmoil in the U.S, whereby Democrats are pushing to have President Donald Trump impeached a week to the end of his reign.