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Treasury Yields Climb on Brexit Trade Deal Hopes, Mixed Economic Data

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Things have been looking up for the bond market, with U.S. Treasury yields approaching the recent high notched on Wednesday, following mixed economic reports along with indications of a Brexit trade deal between the U.K. and the European Union. Notably, signs of a new trade deal avoiding tariffs, which are expected to be imposed at the beginning of the New Year, perked up markets and boosted investors’ optimism. However, fear of a new coronavirus strain first identified by the U.K. is a concern.

Specifically, the rate on the 10-year Treasury bond surged to 0.956%, marking the highest level since this March. Further, the yield on the 30-year Treasury bond has climbed to 1.696%.

Factors Driving Treasury Yields

In recent months, yields have climbed on positive signs of coronavirus vaccine approvals in the United States and Europe. Moreover, amid positivity of vaccine, recent news of new coronavirus relief package also raised hopes. Though President Donald Trump’s indications of not signing the long-delayed coronavirus relief package due to low amount in stimulus checks resulted in decline in yields initially, mixed economic reports and anticipation of a trade deal boosted yields on investors' reactions. Notably, U.S. jobless claims were below expectations last week as per Labor Department, while decline in personal income in November exceeded expectations, per Dow Jones.

Therefore, investors’ optimism leads selling of government bonds to some extent on anticipation of faster growth that leads to a higher rate of inflation and reduced accommodative monetary policy from central banks. Further, stronger economy increases risk-taking appetite, which reduces need of holding safe but low-yielding government debt.

Notably, as investors stayed away from safe-haven assets, which raised the benchmark 10-year Treasury yield and lowered bond prices further, financial stocks rallied in the broader market.

The SPDR S&P Bank ETF (KBE) and the SPDR S&P Regional Banking ETF (KRE) gained 2.9% and 3.3%, respectively, on investors’ optimism. Markedly, among major and regional banks, Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) , JPMorgan (JPM - Free Report) , CIT Group (CIT - Free Report) and M&T Bank (MTB) turned green, appreciating 2.9%, 4.8%, 2.8%, 5.4% and 3.7%, respectively.

Notably, with rising yields, mortgage REITs also escalated with the iShares Mortgage Real Estate Capped ETF (REM) recording 2.2%. Among stocks, Invesco Mortgage Capital (IVR - Free Report) , AG Mortgage Trust and MFA Financial (MFA - Free Report) increased 5.9%, 6.2% and 5.2%, respectively.

Conclusion

The coronavirus pandemic has sent jitters across global markets, including the United States. Concerns over the pandemic’s negative impact on the U.S. economy escalated investors’ anxieties earlier and caused the yield on benchmark 10-year Treasury note to sink. However, with the Fed’s support to the economy, hopes of an economic rebound, recent positive signs of Brexit deal and vaccine have kept investors’ optimism alive, pushing yields higher.

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