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Bond Report: Treasury rates mostly climb, despite tumble for Dow industrials on omicron fears

Long-dated Treasury yields rose on Monday, amid worries over the spread of the omicron variant and a major setback for President Joe Biden’s nearly $2 trillion spending package, which fueled concern about the outlook for global growth and sent equity markets lower.

What are yields doing?

The yield on the 10-year Treasury note TMUBMUSD10Y, 1.427% rose 1.7 basis points to 1.418%, reversing earlier rate declines that had it down around 1.38% from 1.401% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite each other.
The 2-year Treasury note TMUBMUSD02Y, 0.633% yielded 0.628%, down 1.2 basis points, compared with 0.64% on Friday afternoon.
The 30-year Treasury bond TMUBMUSD30Y, 1.854% rate was at 1.847%, up 3.1 basis points from 1.816% late Friday.

What’s driving the market?

Treasury rates finished mixed on Monday, but mostly lower, to start an abbreviated week of trading, with fixed-income markets closed on Friday in observance of Christmas and closed an hour early on Thursday at 2 p.m. Eastern Time.

Worries about the spread of the omicron variant of the coronavirus that causes COVID-19 was at the center of the day’s action and briefly dragged long-dated rates lower before they bounced back.

Global equities, however, finished lower as a number of European countries reimposed or considered restrictions on social gatherings and U.S. officials warned of a surge in cases of the transmissible strain of COVID heading into the year-end holidays.

Read: ‘Nobody was expecting omicron—this one really was a curveball:’ Francis Collins, National Institutes of Health outgoing director, shares a parting warning

Adding to concerns about global economic expansion was concern about President Joe Biden’s nearly $2 trillion Build Back Better bill, which appeared to be in jeopardy after Sen. Joe Manchin, D-W. Va., said on Sunday that he couldn’t support the package. A 50-50 split between Democrats and Republicans, with all Republicans opposed to the plan, makes Manchin’s vote crucial.

Parts of Biden’s social-spending and climate package still have a chance of becoming reality, analysts said on Monday.

Still, economists at Goldman Sachs Group Inc. GS, -2.67%, citing Manchin’s opposition to the package, cut their U.S. growth forecast. Specifically, they said the expiration of the child tax credit and the lack of the other new spending that had been expected were behind the reduction in their outlook. Growth was cut to an annualized 2% from 3% for the first quarter of 2022, to 3% from 3.5% for the second, and to 2.75% from 3% in the third quarter.

In the only major data release for Monday, the U.S. leading economic index rose 1.1% in November.

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What are analysts saying?

“Manchin’s objection is linked to the inflationary impact and uncertainties associated with projecting the actual costs. Needless to say, as a meaningful contribution to the market’s assumption of solid real growth in the year ahead, this represents a setback to be sure,” said Ian Lyngen and Ben Jeffery, rates strategists at BMO Capital Markets, in a note. “Let us not forget the building COVID case count and mounting concerns that additional restrictions to combat the omicron variant will further undermine economic performance in the coming months,” they wrote. “While it’s tempting to characterize these concerns as the usual suspects in the current environment, the reality is that the influence of pandemic and stimulus jitters becomes more relevant into year-end as liquidity wanes and conviction is scarce.”
“Some central banks already have acted while others are still contemplating tightening, but this will clearly be the trend for 2022,” wrote Brandywine Global portfolio managers in a recently published 2022 outlook report. “Going forward, monetary policy will no longer be the stimulative tailwind it was in 2020 and 2021. This monetary policy shift certainly makes sense given that inflation has surged and has become ‘less transitory’ along with the number one story line for the markets and a major concern for investors,” they wrote.

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