Yields Hold Near Highs

US bond yields have softened a little bit over the last 24 hours following a breakout on Monday to the highest levels in over a year. US treasury yields have been on a steady climb over recent months with the US 10-Year note seeing its yield improving from lows of around 0.50% in august 2020 to current highs of 1.15%. The 30Y note saw its yield rising above the 2% mark this week for the first time since February 2020, just ahead of the pandemic taking hold.

Vaccine Momentum Lifting Sentiment

The rally in treasury yields is a further reflection of the current investor optimism towards the US vaccination program. With more people now having been vaccinated than have been diagnosed with COVID, the market senses a turning point has been reached and traders are looking ahead to a full recovery over the latter half of the year. Additionally, the rise in bond yields also suggests the market view that Biden’s stimulus program should help bolster this recovery and return to the US to economic growth.

US Economic Forecasts Improving

The Biden administration is currently attempting to push a $1.9 trillion-dollar stimulus package through Congress. With Biden having abandoned his earlier promise of bipartisanship, the president has already secured a majority vote in the lower house of Congress and now just needs to secure backing in the Senate. While there is some caution around centrists in the Democrat party, the prevailing view is that Biden will succeed in passing the bill. Many economists and market players have been revising their US economic projections higher for 2021 as a result.

Stimulus Expectations & Vaccine Optimism

The expectations of a major, imminent stimulus package are bolstering the view that inflation is set to start rising again. US CPI recovered firmly over Q2 and the first half of Q3 last year but stagnated through the end of Q3 and across Q4 as surging virus rates and a return to social restrictions and lockdowns hampered consumer activity. However, with vaccination optimism taking hold and should Biden’s stimulus package be approved, the US is expected to see a sharp uptick in consumer activity especially across Q2 this year. January CPI data due later today will be closely watched and should we see unexpected strength in inflation, this is likely to drive bond yields further higher in the near term.

Technical Views

US10Y

10Y yields have recently broken out above the bearish trend line from 2018 highs and above the 0.96% level. While this level holds as support, the near-term bias remains bullish with the 1.28% and 1.42% levels the next key resistance areas to watch. A break above the latter of which would suggest the start of a broader, bullish reversal in yields.

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