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Traders are looking at stock prices on the 25th (local time), when major indices on the New York Stock Exchange tumbled as a result of a surge in US Treasury yields. expects the recent economic recovery to accelerate and US Treasury yields to skyrocket rapidly. AP Yonhap News
Since the 26th (local time) in New York City, the number of people allowed for indoor business in all restaurants has increased to 35% of the maximum. It has only been two weeks since he allowed business to resume with a cap of 25% on the 12th. This is because the fear of the new coronavirus infection (Corona 19) has decreased considerably.
With the massive spread of the Corona 19 vaccine, the United States economy is rapidly reviving. Consumption and employment indicators, as well as business performance, are notably improving. There are many analyzes that the recent increase in yields on public debt is due to the fact that expectations of economic normalization are reflected immediately.
The United States Department of Labor announced on the 25th that there were 730,000 applications for unemployment benefits last week. This is the lowest since the end of November last year. Compared to a week ago, it decreased by 111,000 people. It was well below the expert estimate (845,000 people) compiled by the Wall Street Journal.
On this day, the Ministry of Commerce increased the economic growth rate in the fourth quarter of last year to 4.1%, 0.1 percentage points from the preliminary value published last month. Durable goods orders in January this year increased 3.4% over the previous year. The growth rate far exceeded the market forecast (1.0%).
Corporate earnings in the fourth quarter of last year (or the first quarter of fiscal 2021) were unexpectedly strong. As a result of a comprehensive survey of companies listed on the S & P500, which had been disclosed by Yadeni Research, an investment advisory firm, the proportion of “earnings surprises” reached 80.6%.
It is analyzed that the confidence that sooner or later it will be able to control Corona 19 is behind the momentum of the US economic recovery. According to Johns Hopkins University, the number of confirmed cases per day in the United States decreased by 62% from the previous month to 20. The number of deaths per day, which has exceeded 3,000 since last month, has decreased by level from the early to mid-2000s this month. “The best stimulus has been confirmed to be a vaccine,” said Son Sung-won, a professor at Loyola Mary Mount University. “Starting in the third quarter of this year, it will be slightly off the trajectory of the economy before Corona. 19.”
As the outlook for an economic recovery accelerated, the 10-year Treasury yield on this day ended at 1.54% per annum, which increased 16 bps (1 bp = 0.01% point) compared to the yesterday. This is the highest figure in more than a year since February 19 (1.56% annually) last year.
The US economy improves rapidly with the effect of vaccines and stimulus … Touch movement of funds of stocks → bonds
Treasury bond yields exceed stock dividend yield Possible fluctuations in the global money market
On the 24th, the founder of Tom Essay of Seven’s Report Research, an investment advisory firm in the United States, warned on the 24th that “the interest rate on 10-year US Treasuries could exceed 1.6 % annually in a few weeks. “The upward pressure on Treasury yields is very strong. However, the Treasury bond rate peaked at 1.614% annually on the 25th, a single day, and ended at 1.54%. Jim Caron, portfolio manager at Morgan Stanley, said: “The interest rate for 10-year Treasuries expected in the market at the end of this year was 1.5% per year.”
○ Mayor who did not believe Powell’s comments
Ironically, there are many analyzes that the recent increase in government debt yields is an expectation of economic recovery. As the US economy showed signs of recovery, the outlook for inflation (rising inflation) extended and yields spiked primarily on long-term government bonds. The 10-year Treasury rate was just 0.9% a year earlier this year.
Fed Chairman Jerome Powell attended a House hearing and said: “It will take more than three years to reach the 2.0% inflation target,” but the market did not immediately buy it. He believes that the inflation rate could be faster than expected if the economy normalizes. Markets are concerned that if that happens, the Federal Reserve will decline early (reduce asset purchases).
The retail sales announced by the Ministry of Commerce on the 17th also stood out. Last month, retail sales increased by 5.3% compared to the previous month, far exceeding the estimate of experts (1.1%). It’s also a four-month rally from last September.
Expectations for the unemployment rate for February, due out on the 5th of next month, are also growing. The US unemployment rate reached 14.8% in April last year, but fell to 6.3% last month. Although the Fed has been concerned about the weakness of employment, it cannot be ruled out that employment indicators have improved. “There is no question that we can achieve a 6% growth rate this year,” said John Williams, governor of the Federal Bank of New York. If the 6% growth rate is achieved, it will reach the highest level after 1984 (7.2%).
○ Super stimulus measures are also awaiting additional supply of vaccines
The expectation that the Johnson & Johnson (J&J) vaccine, called a “game changer”, will be distributed sooner or later is also a factor that increases expectations of economic normalization. As the United States Food and Drug Administration (FDA) has already recognized the preventive effect and safety of the J&J vaccine, official approval for its use is expected to be issued on the 27th.
The J&J vaccine showed a 72% preventive effect in clinical trials in the US The effect on the severity of Corona 19 is greater than 86%. This means that if you receive this vaccine, your chances of being hospitalized or killed by Corona 19 are significantly lower. In fact, no one died from receiving this vaccine during clinical trials, and a single dose can form antibodies. It can be stored for at least 3 months at normal refrigeration temperature, so it is optimized for mass distribution. J&J plans to supply 100 million doses of vaccines to the United States by the end of June.
The $ 1.9 trillion ‘super stimulus plan’ is highly likely to be rolled out early to mid next month. This is because the proposal to increase the minimum wage, which was controversial even within the Democratic Party, was removed from the final stimulus bill. The prospects are high that the stimulus bill will pass the Senate early next month without much disagreement. The experts diagnosed that expanding the diffusion of vaccines and applying additional stimulus measures will play a decisive role in accelerating the economic recovery.
○ Are assets transferred from stocks to bonds?
As government bond yields rise, global liquidity increases the possibility of moving from risky assets like stocks to bonds. This is because if the benchmark 10-year Treasury yield exceeds 1.5% per annum, the average dividend yield on stocks will be exceeded. Last year, the dividend yield for the S & P500 index was about 1.48% per year. S&P Dow Jones senior analyst Howard Silverblatt said “US Treasuries are not only a safe asset, but they are also attractive for investment,” he said. “Relatively, all stocks are at risk.”
However, there are some views that the recent rise in government debt yields will be only temporary. Daniel Ivasin, chief investment officer (CIO) of Pimco, a global bond management company, said: “The economic recovery will be strong, but concerns about inflation will be only temporary.” Said.
“Even if the economic outlook has changed optimistically, it does not mean that inflation will approach the Fed’s target (2.0%) in the short term.”
New York = Correspondent Jae-gil Cho [email protected]
