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The competitions will determine control of the Senate for the next two years. Many believe a democratically controlled Senate could make it easier for lawmakers to enforce a bigger incentive. More government spending could lead to higher inflation, which would lead to higher returns.
"It's almost as if the market is just relieved that we are coming to a conclusion and the returns are spreading wider. Investors bet on more deficits, more spending and more government bonds when Democrats take control of the Senate," said Gregory Faranello, head of US pricing at AmeriVet Securities. "Now that the 10 year old has broken 1%, we'll be spending some time in the 0.75% to 1.25% range."
Earlier this week, 10-year inflation expectations broke even at 2% for the first time in more than two years.
It was a slow rebound from the 10-year rate, which fell to a record low of 0.318% in March amid a historic flight to safe assets amid the depth of the pandemic. With unprecedented monetary and fiscal stimulus, bond yields have gradually increased, but ongoing Covid uncertainty and uneven economic data have made interest rates bumpy.
Earlier this week bond yields were boosted by stronger-than-expected economic data.
A U.S. manufacturing activity index rebounded to 60.7 last month, its highest level since August 2018, according to the Institute for Supply Management. Economists polled by Dow Jones had forecast the index would fall to 57.0 in December.
Tom Essaye, founder of Sevens Report, said the breakout in yields shouldn't put pressure on risk-weighted assets in the short term.
"That wouldn't be a direct headwind for stocks, but it would reinforce that rising yields are an issue that we need to watch closely in 2021," Essaye said on Tuesday.
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