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Growth in US Yields: Growth in Real Rate Revenues

(Bloomberg) – The next rise in long-term Treasury yields may be due to so-called real rates, one of the bond market’s cleanest indicators of growth prospects. A spike in strong economic performance is a giant job creation figure on Friday. and now a report from the Institute for Supply Management, showing record growth in services, is fueling bets that expectations of growth, rather than inflation, will dominate the description of Treasury bonds. This is an important distinction because at higher real rates, which rule out inflation, it is assumed that investors see an economic rebound from the gathering pandemic, sustained growth could hurt other assets, including stocks. Relatively risky assets could begin to suffer as the market signals growth is getting so strong that it expects the Federal Reserve to begin discussing a cut in its asset purchases as a step towards tightening policy. at the rate on Treasury bonds linked to inflation – is about minus 0.65%, which is close to the highest level since mid-2020 and above the record low of minus 1.12% in September. The last time the Fed cut in the near future, real yields changed from clearly negative to firmly positive during the year until December 2013 – when the Fed said it would begin to cut back on asset purchases. “We see strong March payroll and ISM data as early signs of strong economic data, which, coupled with the prospect of further budget spending, should be sufficient to drive profitability further,” wrote Pravin Corapati, chief rates strategist at Goldman Sachs Group Inc. Note. “However, a smaller rise in inflation may more strongly tilt the pattern of any yield increase towards real returns.” The ten-year nominal return is around 1.7%, holding below the 1.77% level reached on March 30, the highest level since January 2020. Korapaty predicts that the yield on 10-year bonds at the end of 2021 will be 1.9%, and in a year will rise to 2.1%. Christian Müller-Glissmann, the bank’s portfolio strategist, told Bloomberg Television on Tuesday that they could surpass 2.3% in the second quarter. Most Wall Street strategists say the central bank will start thinking about cutting rates before raising rates. buying bonds, a move that in the past has been a catalyst for raising real rates. Pacific Investment Management Co. said the Fed could begin negotiations to end its asset purchases in June, while Morgan Stanley predicts it will announce a cutback program in January. The real yield on 10-year bonds fell from minus 0.6% in January. 2013 to a positive 0.76% versus December 2013. Growth in inflationary expectations played a large role in increasing yields in recent months. The bond market is projected to have a 2.35% consumer price rate over the next decade, close to a multi-year high, but the bond market is well aware that while inflation is set to rise, there will be any significant upturns in the months ahead. Jefferies said the March jobs report likely heralds the start of even more positive signs of growth, triggered by underlying effects or comparisons to the abnormally low numbers seen last year, when the pandemic shattered expectations for growth and price pressures. economists Thomas Simons and Aneta Markowska. While it is too early for the Fed to claim victory on its targets, strong data should prompt the central bank to open the door for narrowing discussions, likely at their June meeting – with an announcement in the last quarter of the year, they say. Data from other major economies are also encouraging. Last week, China reported improvements in manufacturing, services and construction in March. The International Monetary Fund is due to release its forecasts for the global economy on Tuesday. As the outlook for real economic growth improves and the Fed signals plans to cut asset purchases, real yields may continue to drive nominal Treasury yields, Bloomberg Intelligence reports. The anticipated cut in Fed placement amid improving economic outlook could push 10-year TIPS yields to positive before asset purchases begin to decline. ”- Ira. F. Jersey and Angelo Manolatos The Fed currently buys about $ 80 billion in Treasury bonds and $ 40 billion in mortgage debt a month. A deeper understanding of the officials’ plans to buy assets may emerge on Wednesday with the release of the minutes of the March central bank meeting. Some investors are not overly concerned about the rise in real rates. If this is what is driving the rise in nominal yields, “this is a good reason for the rate hike,” Karissa McDonough, chief fixed income strategist at Peoples United Advisors Inc., told Bloomberg TV. It is based entirely on some kind of positive economic outlook. ”(Prices update everywhere, added Goldman’s Müller-Glissmann comments in paragraph 6.) For more articles like this, visit bloomberg.com Subscribe now to stay ahead The most trusted source of business news. © 2021 Bloomberg LP