The benchmark 10-year Treasury note has become a barometer of COVID fears, yo-yoing as concern rises and drops.
On Friday, the yield on the 10-year fell below 1.5% as the Dow crashed amid worries about the Omicron variant. On Monday, the yield rose again, moving above 1.5% as concerns faded and equity markets recovered.
The plunge on Friday was more than 15 basis points, while the rise on Monday was less than 5 bps, so investors clearly remain uneasy about the impact of the new coronavirus strain. Also, the string of mutations is itself unsettling as scientists cannot immediately say how effective vaccines are in warding off these infections.
Yield on the 30-year Treasury bond also plunged on Friday, but gained about 3 bps on Monday to about 1.86%.
Friday’s reaction was undoubtedly tinged with panic in what is historically a day of thin trading coming after the Thanksgiving holiday. Even as the alarm ebbed on Monday, however, uncertainty dampened the optimism of recent weeks about a robust economic recovery.
End-of-month positions and anticipation of the US jobs report on Friday will keep investors cautious. For the moment, the 1.5% level on the 10-year yield seems to be the dividing line between optimism and pessimism.
Some Central Bankers Downplay Potential Damage
The knee-jerk reaction of governments to impose travel bans may not lead inevitably to new lockdowns, and some officials are already ruling that out. Research on vaccine effectiveness is likely to take at least a couple of weeks and there will be some volatility as reports come in.
Some analysts expect what they call light lockdowns to be in store. Densely populated Europe has demonstrated considerable vulnerability to waves of infection, and political pressure is already building for renewed restrictions. Swiss voters approved the government’s COVID restrictions with a solid majority of more than 60% in a Sunday referendum.
Initial reports indicate that even though the new variant is highly transmissible, vaccines do provide some protection and symptoms have been mild. These reassurances allowed investors to temper the risk-off panic from Friday.
Some central bankers were quick to downplay the impact of Omicron. French central bank governor François Villeroy de Galhau, a member of the European Central Bank’s governing council, said on Monday successive waves of COVID have proven to be less and less damaging.
His remarks echoed those of Raphael Bostic, head of Federal Reserve regional bank in Atlanta, who on Friday said variant strains have also declined in lethality.
But Fed Chairman Jerome Powell was more cautious in prepared remarks for congressional testimony on Tuesday, saying
“the Omicron variant of COVID-19 and a recent uptick in coronavirus cases pose a threat to the US economy.”
The yield on Germany’s 10-year bond, which serves as a benchmark for the European Union, remained low at minus 0.3150 late Monday, after plunging from minus 0.2525 on Friday and edging up yesterday.
The heads of Germany’s 16 states are pressuring caretaker Chancellor Angela Merkel and Chancellor-designate Olaf Scholz to apply uniform COVID restrictions across the country as the constitutional court is set to rule on Tuesday on implementation of the so-called emergency brake of restrictive measures.