While investment-grade and junk corporate yields were stable this week, government bonds sent strong signals in the United States, United Kingdom and Italy. In this article, we look at this week's top events and attempt to understand what can come next.
US yield curve continues to steepen inflicting losses to bondholders
This week, the reflation story has picked up the pace. The 5s30s spread is the widest in six years, and 30-year yields are trading above 1.9%, the highest level seen since February 2020.
The nonfarm payrolls coming out today might give another push Treasury yields higher if the data surprises on the upside. If that were to materialize, the 30-year yields would rise to test their resistance at 2%.
Regardless of what will happen with the nonfarm payrolls today, we believe the yield curve is trading in an uptrend and will continue to steepen. To put pressure on US Treasury yields are the inflationary forces coming from easy monetary policies, fiscal stimulus and a possible pick up of the velocity of money later in the year.
Since the beginning of January, US Treasury bonds across the yield curve have reported an average loss of 1.35%. At the same time bonds with a maturity longer than 20-years have recorded a loss of 5.15%. As yields continue to rise, it becomes crucial to building a buffer against rising yields by seeking coupon income.