Bond Report: Treasury yields bounce higher after Friday’s omicron-sparked slide

What are yields doing?

• The yield on the 10-year Treasury note TMUBMUSD10Y, 1.547% rose to 1.549%, up from 1.484% at the end of a holiday-shortened session on Friday afternoon. Yields rise as Treasury prices fall.
• The 2-year Treasury yield TMUBMUSD02Y, 0.551% was 0.555% compared with 0.51.8% on Friday afternoon.
• The 30-year Treasury bond TMUBMUSD30Y, 1.887% yielded 1.887% versus 1.83% at the end of last week.
• On Friday, the 10-year yield plunged 16 basis points for its biggest one-day drop since March 23, 2020, while the 12.6 basis point tumble in the 2-year rate was the largest since March 9, 2020, according to Dow Jones Market Data. The 30-year yield fell 13.9 basis points, the biggest one-day fall since April 15, 2020.

What’s driving the market?

Friday’s Treasury rally, amplified by holiday trading conditions in a shortened session the day after Thanksgiving, was the largest since the early days of the pandemic. The World Health Organization’s technical advisory group on Friday declared omicron a “variant of concern,” with several countries imposing flight bans from countries in southern Africa, where the variant was first discovered. Omicron has been detected in around a dozen countries, according to media reports.

But investors appeared to be ready to dip back into assets perceived as risky, though questions remain about the transmissibility of the omicron variant and whether infections are more severe than from the delta variant. Analysts said anecdotal reports from physicians in South Africa indicating that omicron symptoms aren’t more severe were helping overall sentiment, though definitive assessments likely remain weeks away.

Yields were rising Monday as stock-index futures pointed to a rebound for equities, which saw their worst day in more than a year on Friday. Oil futures also rose after the U.S. benchmark CL00, +4.80% slumped 13%.

Before the discovery of the new variant, investors had started to lean toward the potential for the Federal Reserve to announce that it was ready to speed the tapering of asset purchases at its December policy meeting. The emergence of the omicron variant is seen undercutting prospects for an accelerated taper, analysts said.

Remarks by Fed Chairman Jerome Powell, who is set to speak at a New York Fed event at 3 p.m. Eastern, will be closely watched. European Central Bank President Christine Lagarde is due to speak at an event in Turin at 6:15 p.m. Central European Time, or 12:15 p.m. Eastern.

What are analysts saying?

“We know the new variant is very different, potentially more contagious, and more resistant to current vaccines. But we don’t know how dangerous it is to health, though early reports that it isn’t very dangerous are very seductive,” said Kit Juckes, global macro strategist at Société Générale, in a note.

“And so, only part of Friday’s madness has been reversed. Uncertainty is even higher than it was before. Jay Powell and Christine Lagarde, both speaking today, will sound more cautious in the light of new information. And the new information will make the market’s interpretation of this week’s data less confident,” he said.

“We still know almost nothing definitive about whether omicron is more transmissible or deadly than other coronavirus variants, but it adds to the downside risks, which were already on the rise with the winter surge in infections in the Northeast and the Midwest,” said Paul Ashworth, chief North America economist at Capital Economics.

“Under those circumstances, we think it is unlikely that the Fed will accelerate the pace of its QE taper at [its Dec. 14-15] FOMC meeting, which could have paved the way for interest rate hikes earlier next year,” Ashworth said, in a note. “There is some debate about whether omicron will add to inflationary pressure if it affects supply more than demand, but the collapse in energy prices suggest that, initially at least, the impact will be strongly disinflationary.”