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Bond Report: Treasury Yields Rise After Omikrones Triggered Slide On Friday

Treasury bond yields rose Monday, resuming part of the decline seen as US Treasury investors amassed stocks and commodities, especially oil, in the middle of a Black Friday, triggered by the discovery of the Omicron variant of the coronavirus , which causes COVID-19.

What do returns do?

The yield on the 10-year government bond
TMUBMUSD10Y,
1.549%
increased to 1.549%, compared to 1.484% at the end of a Friday afternoon session shortened by holidays. Returns rise when Treasury prices fall.

The 2 year Treasury yield
TMUBMUSD02Y,
0.555%
was 0.555% versus 0.51.8% on Friday afternoon.

The 30-year government bond
TMUBMUSD30Y,
1.887%
returned 1.887% compared to 1.83% at the end of last week.

On Friday, the 10-year rate fell 16 basis points for the largest one-day decline since March 23, 2020, while the 2-year rate fell by 12.6 basis points, the largest since the 9th market data. The 30-year yield fell 13.9 basis points, the largest one-day decline since April 15, 2020.

What is driving the market?

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

However, investors seemed willing to re-enter perceived risky assets, despite questions about the portability of the Omicron variant and whether the infections are more serious than the Delta variant. Analysts said anecdotal reports from doctors in South Africa suggesting the omicron symptoms weren't any more severe added to the general mood, although final ratings are likely to remain weeks away.

Yields rose Monday as stock index futures pointed to a rally in stocks, which had its worst day in more than a year on Friday. Oil futures also rose after the US benchmark
CL00,
+ 4.94%
13% collapsed.

Prior to discovering the new variant, investors had begun to rely on the potential of the Federal Reserve to announce at its December monetary policy meeting that it was ready to accelerate the reduction in bond purchases. The advent of the Omicron variant is undermining prospects for accelerated rejuvenation, analysts said.

Comments from Fed Chairman Jerome Powell, who will address a Fed event in New York at 3 p.m. Eastern, is being watched closely. The President of the European Central Bank, Christine Lagarde, will address an event in Turin at 6.15 p.m. Central European Time or 12:15 p.m. East.

What do analysts say?

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

“And so only part of Friday's madness has been undone. The uncertainty is even greater than before. Jay Powell and Christine Lagarde, both speaking today, will sound more cautious in light of new information. And the new information will make the market less confident about this week's interpretation of the data, ”he said.

"We still know next to nothing definite about whether Omicron is more transmissible or more deadly than other coronavirus variants, but it adds to the downside risks that have already risen with the winter surge in infections in the Northeast and Midwest," said Paul Ashworth, Senior Economist for North America at Capital Economics.

"In these circumstances, we think it is unlikely that the Fed will accelerate the pace of its QE rejuvenation at its FOMC meeting December 14-15, which could have paved the way for rate hikes early next year," said Ashworth , on a note. "There is some debate about whether Omicron will add inflationary pressures if it affects supply more than demand, but the collapse in energy prices suggests that the effects will be severely disinflationary, at least initially."

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