Yields on U.S. Treasuries surged early Monday as expectations of a large fiscal stimulus grew, with the 30-year bond yield briefly topping 2%, but yields retreated from highs as the day went on.
Treasury Secretary Janet Yellen said Sunday the U.S. could return to full employment by next year if the full $1.9 trillion package proposed by President Joseph Biden is passed.
Coming on top of the Senate passing a resolution last week to push through the package as a budget reconciliation measure—a tactic that enables Democrats to bypass filibuster rules that would enable Republicans to block the legislation—the seal of approval from the former Fed Chair made passage likelier.
As head of the San Francisco Federal Reserve regional bank in 2009, Yellen was a strong proponent for big fiscal stimulus to counter the financial crisis early in the first Obama administration.
Then, as now, she was at odds with Larry Summers, a former Treasury secretary, but this time she is in government office and he isn’t. Summers warned last week that the massive stimulus package could create inflationary pressures.
The administration kept the package below $1 trillion in 2009 to avoid sticker shock, and critics have blamed this failure to act for the slow recovery.
Yellen doesn’t want to make the same mistake this time (though Summers says now he also wanted a bigger stimulus package in 2009, but that got nixed for political reasons).
“There’s absolutely no reason why we should suffer through a long slow recovery,” she said on a Sunday morning talk show. “I would expect that if this package is passed that we would get back to full employment next year.”
Summers isn’t alone, however. Last week, St. Louis Fed Chief James Bullard said he thinks Democrats should keep their fiscal powder dry because the economic recovery will be fine without further stimulus.
Markets seemed at least partially to vindicate Summers. The 10-year breakeven rate—a measure of inflation expectations derived from the difference between conventional Treasuries and inflation-protected notes—shot up to 2.2%, after exceeding 2% for the first time in two years last month.
Federal Reserve policymakers continue to play down inflation worries. Richmond Fed chief Thomas Barkin dismissed inflation fears in an interview Monday, saying there are also deflationary risks and the economy still needs fiscal support.
President Biden seems ready to give up on one part of the stimulus package—more than doubling the federal minimum wage to $15—after some Democrats objected. It doesn’t have much to do with COVID-19 relief anyway.
Yields on the benchmark 10-year Treasury note fell to below 1.17% after topping 1.2% earlier. Yields on the 30-year fell to just above 1.95% after their earlier high. But both remained higher than last week.
The Treasury Department is planning to sell $126 billion in notes and bonds this week, and analysts said the higher yields will spur demand.
Yields on two-year notes remained low amid confidence that the Fed won’t raise short-term rates anytime soon, so the increase in longer-term yields steepened the yield curve. The gap between two-year and 10-year notes widened 109 basis points at one point.