Treasury Yields Edge Higher on Recovery Optimism

U.S. Treasury yields rose as signs of an economic bounce from the Covid-19 pandemic encouraged investors to move money into riskier assets.

The yield on 10-year Treasurys was 0.022 percentage points higher on Monday than last week at 0.691%, while the two-year yield was 0.006 points higher at 0.161%, according to Tradeweb. That put the gap between the two yields at its largest since June 17.

A widening gap between 10-year Treasury yields and those on two-year Treasurys is a sign that investors expect faster growth and higher interest rates in future. This is known as a steepening of the yield curve. Investors often sell Treasurys, which are considered super safe, when they want to put more money into riskier corporate debt or stocks. Bond yields rise as prices fall.

While there has been a sharp increase in U.S. Covid-19 cases in recent weeks, many investors believe there won't be a return to the type of economic lockdowns imposed in March and April.

A quick rebound in spending among consumers, especially in the U.S., has been one cause for optimism, according to Anna Stupnytska, head of global macro at Fidelity International.

U.S. retail sales jumped 17.7% in May after dropping 14.7% in April, even though the economy has only partly reopened. Other data has also improved, with U.S. purchasing managers' survey numbers for manufacturing moving back into expansionary territory last week as well.

Others have concerns that bond investors are getting too optimistic, according to Ralf Preusser, global head of rates research at Bank of America Merrill Lynch.

"A recovery needs a sufficient response on the monetary policy, fiscal policy and public health front," he said. Failure on any of these could threaten the rebound as a whole, he added.

Fiscal policy, encompassing spending by governments to support economies, is the main looming threat, analysts and investors say. Some fear European governments aren't doing enough, while the U.K. and U.S. are both due to cut back support programs from next month, which Mr. Preusser called "worrying fiscal cliffs."

Ten-year yields have been climbing slowly but steadily since June 26, when they closed at their lowest levels since mid-May. German 10-year yields were also marginally higher on Monday at minus 0.471%, while other European yields were marginally lower.

Write to Paul J. Davies at paul.davies@wsj.com


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  07-06-20 0756ET
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