Yields on US bonds are rising alongside the inflation expectations

Long-term bond yields in the United States are at their highest levels in the past year, and expectations of Joe Biden's fiscal package, which will support economic growth, will also support inflation. Demand for the US dollar and a slowdown in the US housing market can be expected in the short term.

30-year US bond yields over 2%

Yields on 30-year bonds rose above 2% for the first time since February and have risen by 0.36% since the beginning of the year alone. Rising yields reflect falling US bond prices at the same time as the newly elected US President Joe Biden comes up with his stimulus package. Furthemore, the new fiscal package follows a $ 900 billion injection from last year. However, along with expectations of a faster economic recovery, expectations of faster price growth are also beginning to rise. Along with massive monetary stimuli, money ends up mostly in the private sector, from where it enters the economy much faster.

Chart: 30-year US bond yields (Source: FT.com)

Rising inflation expectations

It is difficult not to expect inflation against the background of massive short-term stimulus measures. Over time, we can also see inflation of prices in wages, asset prices, but also in goods and services. Core inflation, which does not include more volatile food and energy components, only stagnated at 1.6% in December, with the latest figures for January to be published this Wednesday. The main instrument of market inflation expectations, otherwise known as the 10-year break-even rate, rose today to 2.2%, the highest since 2014.

Chart: Inflation expectations (Source: FT.com)

Impact on the US dollar

A number of leading economists have already warned that fiscal stimulus may trigger inflationary pressures with implications for the value of the US dollar and the financial stability of the US economy which we have not seen over the past few decades. The new Secretary of the Treasury, Janer Yellen, has watered down the view, saying that American lawmakers should now focus primarily on starting the labor market. "I have spent many years studying and worrying about inflation. If this risk materializes, we have the tools to take care of it, "said Yellen.

In the short term, however, rising yields may help the US dollar, from which everyone expects contintinuation of the last year’s trend, therefore further weakening. In the longer term, this is a growing risk for the dollar, which could weaken it for several years. In the same way, a decline in the housing market can be expected, which has benefited from extremely low long-term rates.

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