COVID Worries Keep Treasury Yields Low, Dampen Expectations On Fed

Investors are busy scaling back their expectations for the Federal Reserve’s annual symposium this week, which is normally held in the Wyoming resort of Jackson Hole but has now been moved to an online format because of the rise in COVID infections.

With trading already thinned out by vacations, the market for U.S. Treasuries remains jumpy and volatile. Monday trading was mixed, as yield on the benchmark 10-year note veered briefly above 1.28% before returning to the 1.25% of late Friday.

US 10-year Weekly Chart

Market strategists complained about the thinness of trading and the lack of liquidity in the Treasury market ahead of the Fed symposium.

Any hope of a specific announcement on tapering bond purchases evaporated as the Delta variant of the coronavirus gained traction and threatened to dampen economic data.

The burst of growth evidenced by the release Monday of the Chicago Fed’s economic activity index—which rose to 0.53 in July from minus 0.01 in June—already seems like ancient history as investors and Fed policymakers look for clues about the coming impact of a renewed surge in infections.

Also on Monday, existing home sales rose 1.5% on the year in July after a gain of 1.4% in June, but that indicator, too, may suffer from a pullback as buyers weigh the uncertainty of a prolonged pandemic.

Delta Variant—Not Politicals—Driving Safe Haven Flows

Political turbulence is having little effect as investors remain laser-focused on how the Fed will react to Delta.

The troubled withdrawal of U.S. troops from Afghanistan and immediate Taliban takeover pushed President Joe Biden’s approval ratings into negative territory for the first time, while a rift among House Democrats over spending bills threatened to become a standoff blocking legislation.

None of that appears to significantly affect investor behavior as Fed Chairman Jerome Powell—who tends to be dovish in the best of times—is now expected to be very much so while remaining quite vague in his speech Friday.

Though it has baffled economists, investors, who have kept Treasury yields low in recent weeks despite signs of a robust recovery, are starting to look prescient. Bitcoin bulls see a silver lining in low Treasury yields, figuring they could prompt investors to buy the cryptocurrency as well as gold in search of higher returns.

Still, Monday’s spike encouraged some analysts to forecast higher yields in the months ahead as they expect recovery to continue strong even amid COVID uncertainty.

Continued European Economic Growth 

German 10-year Weekly Chart

In Europe, government bonds followed a more predictable trajectory as IHS Markit’s Flash Composite Purchasing Manager's Index continued to show growth in August, albeit slightly slower than in July, pushing the yield on Germany’s benchmark 10-year bond up 3 basis points to minus 0.457% at one point.

Inflation expectations rose slightly as industrial companies said they had to pay more for inputs and were passing that on to consumers. But European manufacturers are buying into the forecast that these increases are temporary.