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NEW YORK, March 31 (Reuters) – U.S. government bond yields rose on Wednesday after U.S. President Joe Biden unveiled a multitrillion dollar infrastructure endeavor.
Biden will propose a $2 trillion package to invest in traditional projects like roads and bridges alongside tackling climate change and boosting human services like elder care. The tab is expected to grow to a combined $4 trillion once he rolls out the second part of his economic plan in April.
Additional economic growth prospects helped push yields higher. Already, bets for significant growth this year as coronavirus vaccines are rolled out have lifted yields in the first quarter. So too has the surge in new supply of government debt, issued to fund prior pandemic relief bills.
The benchmark 10-year yield has risen more than 80 basis points in the first quarter, back to pre-pandemic levels, the largest quarterly rise since the end of 2016. With the Federal Reserve staunchly committed to near-zero interest rates, the two-year yield has remained roughly anchored, making the yield curve to the steepest since 2015.
Quarter-end demand for longer-dated debt from traders rebalancing portfolios would have typically driven yields lower, but that did not happen.
“The final trading session of a defining quarter ended with record high S&P levels and 10-year yields within striking distance of the pandemic peak of 1.77%,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
“The rebalancing and rotation demand failed to offset the positive sentiment associated with the potential for Biden’s infrastructure agenda to contribute further to the recovery outlook.”
The big drivers pushing yields higher – expectations of higher growth and inflation, increased Treasury supply – are likely to continue in the next quarter.
“If the economy continues to show that it is gaining momentum, and inflation picks up, with all this money in the system, I think that higher rates is where we should be going,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald. (Reporting by Kate Duguid; editing by Jonathan Oatis and Richard Chang)
