Bond traders close out chaotic year with key 1% level in sight

Treasury traders are buzzing about 1% yields again, with all eyes on whether a massive slate of auctions next week and two key US Senate runoff elections in early January could get them there.

Rates on 10-year notes got as high as 0.971% on Wednesday after investors shifted out of bonds as Brexit negotiations looked headed for resolution, something that did indeed arrive on Christmas Eve. And major catalysts ahead — a trio of US auctions totalling a record $176 billion amid low liquidity in a holiday-shortened week, plus the January 5 vote in Georgia — could further diminish the appeal of Treasuries, increasing rates.

The widely watched 10-year yield has largely trended higher this month, but has failed to break through the 1% level last seen early in the pandemic. Democrats winning both Senate seats — and therefore control of Congress — could cause this rates barrier to fail, since the party appears more willing to unleash fiscal stimulus that gets the US economy on solid footing.

The elections’ outcome “could increase movement in that direction, but 1% is a big point of resistance,” said Tom Martin, a senior portfolio manager at Atlanta-based asset manager and investment adviser Globalt Investments. Still, “Georgia is the next big news item to watch.”

There’s plenty of reasons why the 10-year rate, a benchmark for long-term borrowing costs and weather vane for investor sentiment, might miss the mark once again. One is that the Federal Reserve is keeping policy rates near zero for a prolonged period, while reserving the option to hold down long-term rates if needed.

Another is that the still-raging coronavirus is casting doubt on the ability of the US and global economies to return to normal anytime soon.

Over the past week, the Treasury options market has seen increased activity for the time period covering early 2021, which captures the Georgia runoffs in which voting is already underway. Higher levels of implied volatility in the market reflect the view that a Democratic win of both races, which would give the party full control of Congress plus the White House, would put more aggressive fiscal stimulus on the radar — and raise the risk of a sharp selloff in the long end of the bond market.

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