Investors set foot on unfamiliar territory. The yield of 10-year-old government bonds continues to grow, which makes the participants of the market doubt the readiness of the Federal Reserve System to maintain a stimulating nature of monetary policy until the time of full and sustainable employment restoration.
The yield of 10-year-old papers on Monday overcame the mark of 1.6%, and then stabilized below this level. In the meantime, 10-year-old inflationary expectations, calculated on the basis of bond protected from inflation, were kept significantly higher than 2% (actually approaching 2.25%).
At the same time, analysts note that five-year inflationary expectations were even higher (more than 2.5%); It can be assumed that investors expect Fed intervention in order to slow down prices.
On Monday, the tone of the markets asked the fact of adoption by the Senate of the stimulus package of 1.9 trillion dollars. The Dow Jones Industrial Average grew by almost 1% to 31,802, while the cost of government bonds decreased, and their yield was much higher than the level of closing Friday (prices of bonds are inversely proportional to profitability).
Smoothing of the incidence curve, new incentives and growing demand
The Chamber of Representatives may approve a draft assistance on Tuesday, sending the draft law on the signature to President Joseph Biden. Economic growth due to direct payments to the population and expansion of unemployment benefits (along with other expenses) is superimposed on a noticeable decrease in the incidence of COVID and the prospects for the resumption of business activity.
No one really knows what will happen when the restrictions will be removed. Will the combination of deferred demand, forced savings and incentives of the growth catalyst and, in turn, will inflation? It seems that the markets are expected, but the growth rates and inflation remain in question.
Will the Fed be able to keep interest rates on the near-theulous level in the face of growing inflation? Maybe. Or maybe not.
Will there be an increase in rates (with the intervention of Fed or without it) to choke the restoration of the economy and prevent complete employment to which the central bank is aimed at? Maybe.
The auction of 10-year-old government bonds of 38 billion dollars planned on Wednesday will give some idea of how stable the market. For example, on February 25, primary dealers were forced to acquire most of the seven-year papers.
The profitability of state bonds of the eurozone also rose on Monday following the US papers. Additional support was the leap of Brent oil above 70 dollars per barrel after a suppressed attack on the objects of the oil infrastructure of Saudi Arabia.
On the evening of Monday, the European Central Bank reported a slowdown in the rate of redemption of bonds under the emergency economy program (PEPP). For the week, completed on March 3, the regulator acquired papers by 11.9 billion euros, while the week earlier he bought bonds by 12 billion euros (the average weekly indicator is 18 billion). And this is despite the fact that Pepp's "wallet" is still almost 1 trillion euro. The ECB stated that the volume was reduced due to a large amount of repayments, but analysts came to the conclusion that the central bank officials do not see the need to contain the increase in profitability.
The Board of Governors of the ECB will meet this week, and investors will look for any signs of possible increasing bond repurchases.
Fed officials, in turn, are actively preparing for the "Silence Period", assuring the markets that employment, not inflation, is their main priority. And not only the overall rate, but also a more detailed incision, taking into account the high level of unemployment among ethnic minorities. The next meeting of the Committee on Operations in the open market will be held March 16-17.
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