Yesterday the yield on the benchmark ten-year U.S. Treasury note surpassed 1% for the first time since the pandemic kicked into high gear and the U.S. Federal Reserve began its unprecedented, aggressive response. At the same time, inflation expectations have been climbing, leaving real yields decidedly negative, which is a good thing for stocks. The spread between the ten-year T-note and the three-month T-bill also has moved higher and is now nearing 1%. One doesn’t need a degree in mathematics to ascertain that short rates must be near zero, where we expect they will remain for the foreseeable future. This curve steepening is a reflection of an improving economic outlook and is welcome relief for financials, in particular banks, whose core business is based on short-term borrowing and long-term lending. As the outlook for economic growth gets better, so too should the performance of financials and other cyclical sectors, which generally have lagged over the last several years but are leading the charge in the first few trading days of 2021.
Source: Bloomberg, as of 1/7/21.
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