Yesterday, USTs came under pressure although recovered somewhat into the close. The UST curve steepened with the 2s30s spread widening ~4bps while the UST 10-year yield pushed above 0.8% a level it has not traded at since June. There was also a USD 22bn 20-year bond sale for the market to absorb which came at a yield of 1.37% and a solid bid-cover ratio of 2.43.
Expectations of further fiscal stimulus is one factor weighing on USTs as stimulus package talks between House Speaker Nancy Pelosi and US Treasury Secretary Steven Mnuchin continue and White House Chief of Staff Mark Meadows had commented the goal was to try and agree “some kind of deal” in the next 48 hours. Whether the Senate would pass the legislation ahead of the election is less clear and with Biden looking comfortably ahead in the polls the potential for a ‘blue sweep’ increases the chance of a larger package albeit at a later date. That said, later in the day Director of National Intelligence John Ratcliffe warned of election interference from Russia and Iran suggesting a contested election is not completely out of question either.
Speaking at an event yesterday, Fed Governor Lael Brainard emphasised the importance of further fiscal stimulus stating: “Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialise. Too little support would lead to a slower and weaker recovery. Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity.” Meanwhile, the Fed Beige Book report for October pointed to a continued increase in economic activity across all Districts but “with the pace of growth characterised as slight to modest in most districts” and noted that “Changes in activity varied greatly by sector”. According to a Bloomberg article, the word “uncertainty” appeared in the report 20 times!
With all these events in mind, and coronavirus infections and accompanying restrictions on the rise again, and absent a vaccine, it does seem that the uncertain global economic outlook looks set to continue into the year-end.