Yields on the benchmark 10-year Treasury note continued to rise on Tuesday after the U.S. holiday Monday and a weekend marked by the acquittal of former President Donald Trump in the Senate impeachment trial.
After crashing through the 1.2% barrier on Friday, the 10-year shot up above 1.3% on Tuesday. The 30-year bond yield topped 2.09% in Tuesday trading.
The Senate vote had been a foregone conclusion since Republicans had indicated in earlier votes that they consider an impeachment of a president who has left office as something that doesn't conform with the Constitution. The main news was the decision not to go ahead with calling witnesses, which would have prolonged the procedure for days or even weeks.
The focus now shifts to President Joseph Biden’s drive for a $1.9 trillion fiscal stimulus bill, and the rollout of the COVID-19 vaccines, with their promise of getting the economy back on track. Investors are selling the super-safe Treasuries (yields move inversely to prices), and moving toward riskier assets.
Europe had its own political news to digest. Mario Draghi’s successful formation of a new Italian government increased demand for that country’s government bonds.
At one point, the sale of 10-year bonds Tuesday drew €110 billion in demand before the borrower sweetened terms on the €10 billion issue, pricing it to yield a slightly lower premium to the 0.6% yield on existing bonds. The 10-year bond yield slipped to below 0.567% in late trading.
Investors expect Draghi, the former head of the European Central Bank, to come up with a convincing plan for spending the €200 billion earmarked for Italy in the European Union’s economic recovery program.
The Italian sale follows on the heels of Spain’s massively oversubscribed offering of 50-year bonds last week, as the €5 billion issue drew €65 billion in offers for a 1.45% coupon.
However, yields on Spain’s benchmark 10-year bonds, which got as low as 0.105% last week, shot up briefly this week to more than 0.3% after the news that pro-independence Catalan parties had strengthened their majority in regional elections Sunday.
European countries have been rushing to cash in on investor interest as European Central Bank asset purchases and the planned EU aid continued to bolster prices. Portugal raised €3 billion in 30-year bonds earlier this month and Belgium and France raised €5 billion and €7 billion respectively with the sale of 50-year bonds.
Yields on the long maturity debt have increased in the wake of the Spanish sale, prompting some analysts to speculate the window on long-term issues may have closed.
On both sides of the Atlantic, investors are now starting to factor in higher inflation, as fiscal and monetary stimulus to combat COVID-19 are heating up economies. Record debt issuance from the pandemic is also weighing on bond prices even as central bank purchases support them.
German bond yields, for instance, often viewed as a benchmark for all of Europe, have risen, with the 10-year yield hitting a five-month high of minus 0.376% on Monday, before retreating to minus 0.393% on Tuesday.
The gap between the German 10-year and the Italian 10-year has narrowed to about 90 basis points, after widening to more than 120 bps last month.