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The Treasury market buckled Tuesday at the prospect of a flood of U.S. spending to fend off an economic nightmare.
Yields at the long end of the curve shot higher on Treasury Secretary Steve Mnuchin’s proposal for a $1.2 trillion stimulus package. Rates on 10- and 30-year bonds shot up more than 36 basis points, their biggest one-day increases since 1982, while an iShares ETF tracking Treasuries maturing in 20 or more years sank a record 6.7%. The U.S. 10-year yield, the world’s borrowing benchmark, is now more than 70 basis points above the record low set last week.
The surge in yields is in response to the massive supply pressure on the way, rather than any expectations for a recovery in growth or inflation, said Jon Hill, rates strategist at BMO Capital Markets.
“It’s clear there’s a recession coming, and policy makers need to do everything they can to avoid a depression,” Hill said.
Tuesday’s market reaction also follows emergency steps by the Federal Reserve to support commercial-paper markets and pump more liquidity into the system, and Sunday’s surprise interest-rate cut, which took the target policy rate to near-zero. These efforts have amplified the steepening in the yield curve, as the gap between two- and 10-year yields touched its widest point in two years, at 59 basis points.
Expectations of government spending packages across the Atlantic have also driven up European yields higher this week. The U.K. and German benchmarks are both more than 20 basis points higher, with France’s yield having turned positive this week and now trading around its highest point in almost a year.
Meanwhile, a lack of market liquidity is showing up in a massive repricing of real yields, which have vaulted back into positive territory, after the entire curve fell below zero earlier this month. The 10-year hit 0.3%, from last week’s trough of minus 1%. That volatility is going to make for a very difficult auction of 10-year Treasury Inflation-Protected Securities on Thursday.
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