Higher US Treasury Yields — Repricing Term Premium does not Harken Back to the “Taper Tantrum”

  • Long-term US Treasury yields have been rising since late 2020, as the extraordinary monetary and fiscal stimulus have made investors jittery about a potential inflationary shock. Although real yields are edging higher, they are still in negative territory.
  • The fast-paced vaccination programme, coupled with strong economic recovery and government stimulus package, is expected to prop up consumption and investment. A spike in growth fuel consumption adds inflationary pressure. Hence, investors believe Fed to intervene earlier than anticipated in response to rising yield and inflation.
  • Cyclical sectors of the economy and Asia remain attractive opportunities in the fixed income market. Furthermore, pockets of opportunity remain in the broader investment grade and HY fixed income market.
  • USD1.9trn fiscal package (including USD1trn direct aid to individuals and USD440bn to businesses)
  • Successful vaccine rollout (ca 21% of the US population received the first shot of the vaccine and ca 11% population was fully vaccinated as of mid-March)
  • Strong economic data — Unemployment rate has been consistently declining, from the peak 14.8% in April 2020 to 6.2% in February 2021, Q4 2020 GDP grew 4.1% and personal income and consumer spending increased 10.0% and 2.4%, respectively, in January 2021.

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