Treasury Bears Eye Tax Talks as Trigger for Yields to Rise Again

(Bloomberg) -- This month’s retreat in Treasury yields is temporary and tax negotiations among U.S. lawmakers may provide the next trigger for rates to run higher.

That’s the view of Priya Misra, global head of rates strategy at TD Securities in New York, who sees 10-year yields headed for 2% by year end, though “not in a straight line.”

While the Biden administration’s spending plans are expected to boost economic growth and bond yields, its tax agenda presents a significant counterweight. That makes the tension brewing among Democrats on taxes a must-watch area for traders, according to Misra.

Read More: Biden’s Economic Plan Hinges on Unity Among Democrats

“All eyes are on the fiscal negotiations,” she said. “The proposal has huge tax increases but if they get watered down, rates will rise.”

The recent 10-basis-point pullback in 10-year yields -- following a startling surge of more than 80 basis points in the first quarter -- is “more a reality check” on the speed of change than any fundamental shift, said Misra.

She’s not alone in awaiting fresh catalysts to drive yields higher, judging by the ramp-up in short positions on the largest exchange-traded fund for long-dated Treasuries.

If economic data show the economy outstripping official estimates, “markets will likely begin to price in a tapering of bond purchases starting in early 2022 and a first increase in the federal funds rate in early 2023 or even late 2022,” David Kelly, chief global market strategist at JPMorgan Asset Management, said in a note. “This could easily push 10-year Treasury yields above 2% in the months ahead.”

Over the past week though, traders have also been taking in other issues, like patchy vaccine rollouts and Europe’s slower recovery, said John Vail, chief global strategist at at Nikko Asset Management Co. in Tokyo.

“Markets are pausing and taking stock of the economic growth cues,” he said.

The 10-year Treasury yield was little changed at 1.66% at 1:57 p.m. in Tokyo on Wednesday, down from its 2021 peak of 1.77% set on March 30.

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