The U.S. 10-year Treasury yield rallied to a nearly 10-month high Tuesday as investors worried that stimulus measures to combat the economic slowdown caused by COVID-19 could unleash a wave of inflation down the road.
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The benchmark 10-year yield climbed as many as 5.5 basis points Tuesday to a high of 1.187%, a level last seen on Mar. 19, the same day California became the first U.S. state to issue stay-at-home orders slowing the spread of COVID-19. The two-year yield, meanwhile, remained anchored near zero, touching 0.153%.
The action along the curve meant the spread between the 2-year and 10-year yields steepened to an almost four-year high of more than 103 basis points. A steeper yield curve indicates investors are anticipating an economic rebound will occur earlier in that time frame rather than later.
The view that inflation will return “seems to ignore what is happening in the commercial real estate market (and the price bubble set to burst in the residential housing market),” wrote David Rosenberg, chief economist and strategist at the Toronto-based Rosenberg Research.
Commercial property prices fell nearly 10% in 2020, according to the Green Street Commercial Property Price Index, although the hardest hit sectors saw declines of 15% to 25%. Additionally, the retail vacancy rate is projected to hit 6% or higher this year, up from 4.5% a year ago even as rents fall.
The outlook for 2021 remains uncertain as the work-from-home environment caused by COVID-19 continues to plague the commercial property sector.
At the same time, home prices have surged as the socially distant suburbs have provided a nice escape from urban centers. Home prices rose 8.4% year-over-year in October, the most in six years, according to the national Case Shiller index.
Rosenberg said the bearish sentiment in the U.S. Treasury market is similar to that of December 2013, when fiscal stimulus from the Obama administration and a “wildly accommodative” Federal Reserve resulted in a sharp rally in yields. Ultimately, the move was reversed and longer-dated yields pressed to fresh record lows.
“For a contrarian, it was a gift from the gods,” Rosenberg wrote.