Government bond investors are sensitive to political developments but this week has provided a surfeit of political convulsion rarely before seen. Nonetheless, markets took it in stride.
The surprising Democratic sweep of Tuesday's Senate runoff races in Georgia led to a stampede out of US Treasuries as the yield on the 10-year benchmark spiked above 1% for the first time since March.
The rate pushed above 1.05% before retreating, on the news that supporters of President Donald Trump had breached the Capitol building and lawmakers—who were in the process of certifiying Joseph Biden's electoral college win—had to be evacuated.
But there was no panic. Trump urged his supporters to go home peacefully, President-elect Joe Biden appealed for calm, and Washington Mayor Muriel Bowser imposed a 6 p.m. curfew. Reinforcements from the National Guard, the Secret Service, the FBI, and Virginia state police rushed to the Capitol to control the situation. Congress resumed its session by 8 p.m.
After dipping below 1.03%, the 10-year yield recovered to about 1.04%, a gain of more than 8 basis points on the day. Analysts expect Treasury yields to remain in the 1-1.5% range, but not much higher. Inflation expectations may inch up, but not too much.
What’s next? The Capitol riot interrupted the certification of the presidential vote by Congress, but it ultimately occurred, regardless of objections from some Republican lawmakers. The United States may have its own peculiar system of government and an even more peculiar political culture, but it has survived much worse than this.
Though some of the media commentators were bordering on hysteria, it was clear that order would be restored and constitutional procedures for the transfer of power would be followed.
Investors kept their focus on the likelihood of further fiscal stimulus and more government borrowing as Democrats gained full control of the White House and the Congress. It is a fragile control, but the prospect of a robust economic recovery as COVID-19 vaccines are rolled out outweighed the political concerns.
The Dow Jones Industrial Average rose nearly 438 points, or 1.4%, to reach a new record high as equity investors expressed confidence in the US economy. However, the Capitol riot dampened some of the Dow gains as well.
A national embarrassment, as some of the political rhetoric would have it? No doubt, but so what? There’s been a lot of embarrassment lately, but it hasn’t impacted US Treasuries as the safest investment in the world.