Inflation and yield U. S.

U. S. 10-yr yield and invest focus

My note written on Jan. 5 talked about the yield on the U. S. 10-yr Treasury. In four trading days, the yield rose from 0.92% to 1.10% that reached overnight. Yield and price of bond move in opposite directions: when yield rises, price drops.

“U.S. gov­ern­ment-bond yields rose faster than many ex­pected af­ter De­moc­rats won con­trol of the Sen­ate, with traders fo­cus­ing on the po­ten­tial of more eco­nomic stim­u­lus and the re­turn of long-muted in­fla­tion”, a view from a report from the WSJ this morning that I share.

Speaking of economic stimulus, the new U. S. administration will likely design two more packages this year, including an extended package for pandemic relief, and late on an infrastructure spending package, with amount of $1T and $2T, respectively. The Fed balance sheet is hence to hit $10T, 50% of the U. S. GDP.

At the same time, large funds will adjust their bond positions in anticipation of higher inflation, which will add pressure on bond prices (therefore push yield higher). Since the fixed income market is substantially larger than the stock market, money rotating from bond to stocks is likely a huge benefit to the stock prices in 2021. We might have seen it literally on the first trading day of the year.

A second monetary rotation is potentially from tech sector to economy sensitive sectors. Though I have anticipated for some time, that process is yet to see as NASDAQ has kept breaking record. In 2021, I would prefer Dow and S&P companies and would avoid high tech companies – they are lovely but they are too pricy.

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