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10-year Treasury yield surge could prompt Fed response to ease borrowing costs


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10-year Treasury yield surge could prompt Fed response to ease borrowing costs

The announcement of a successful trial of a potential COVID-19 vaccine helped drive the 10-year U.S. Treasury yield to its highest point since March, and as the rate inches toward 1%, the likelihood of a Federal Reserve response may be growing.

The Fed "will start to push back a bit if the 10-year goes much above 1%" because of that yield's influence on common borrowing rates at a precarious time for economic recovery, said Win Thin, global head of currency strategy at Brown Brothers Harriman.

The pushback, Thin said in an email, would likely be verbal intervention rather than actions, at least at first: "I don't think shifting [quantitative easing] or introducing [yield curve control] will be seen unless things really get out of hand."

The 10-year yield fell by 12 basis points Nov. 3-4, dipping to 0.78% as it became increasingly likely that Democratic presidential nominee Joe Biden would win the election and Republicans would, for now, retain control of the Senate, likely limiting the size of the expected next stimulus plan.

That yield then jumped 18 points on Nov. 4-9, reaching 0.96%, where it remained in early trading Nov. 10.

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Rising 10-year yields are a major concern for the Fed because they can dampen spending by driving up mortgage and other common borrowing rates.

Fed officials debated changes to their bond-buying program at their Nov. 5 meeting but held off on any action, with Fed Chairman Jerome Powell telling reporters that the central bank was providing "about the right amount" of support for markets. Among the options that Fed officials have discussed is tilting their Treasury purchases more toward the longer end of the curve.

Asked about potential policy changes on CNBC, San Francisco Fed President Mary Daly indicated she thinks more action is not necessary at the moment but said the Fed had a "robust" discussion on its Treasury purchases last week.

"For now, I really see policy in a good place," Daly told CNBC.

News of Pfizer Inc. and BioNTech SE's investigational coronavirus vaccine likely reduced the chances of further QE as it boosted the likelihood of returning the U.S. economy to relatively normal in the coming months, Tom Essaye, founder of the Sevens Report, wrote in a Nov. 10 note.

"Going forward, the key becomes if the rise in yields stays 'orderly,'" Essaye wrote.

If, for example, the 10-year yield surges too quickly above 1% and touches 1.25% or even 1.5% in the coming weeks, that surge in rates could threaten the "still-fragile" economic recovery, he said.

But until then, any significant response from the Fed is unlikely, said Mickey Levy, chief economist for the Americas and Asia at Berenberg Capital Markets.

The 10-year yield "would have to rise well above 1% for the Fed to even consider a response," Levy said.

If there were a response, it would depend on what is causing the increase in yields, Levy said, adding, "If stronger growth is driving real rates, no problem. If it's rising inflation, the Fed would follow more closely."

The 30-year Treasury yield fell by 11 basis points, to 1.55%, on Nov. 3-4 and then jumped by 18 points Nov. 4-9 to 1.73%, its highest point since March. The 30-year yield was trading at 1.74% in early trading Nov. 10.