On Nov 7, yields on several U.S. sovereign bonds spiked following positive news that the United States and China are likely to roll back existing tariffs that were imposed in phases on each other’s goods.
Strong economic data and better-than-expected performance by U.S. corporates in the third quarter of 2019 are the other catalysts. Investors dumped safe-haven government bonds and opted for risky assets like equities, which resulted in a Wall Street rally.
As a result of these developments, stock prices of several banks surged. A hike in government bond yield will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits.
Yield Curve Steepens
On Nov 7, the yield on benchmark 10-year U.S. Treasury Note increased 11 basis points to 1.924%, marking the highest closing in three months. Notably, the yield climbed intraday to 1.97% — its biggest single-day move since the 2016 presidential election.
The yield on long-term 30-year U.S. Treasury Note gained 10.3 basis points to 2.4%, the highest gain since Sep 13. Moreover, the yield on short-term 2-year U.S. Treasury Note was up 7 basis points to 1.677%, reflecting its largest daily climb since Oct 11. Meanwhile, yield on 3-month U.S. Treasury Bill stayed as low as 1.569.
Following the hike in sovereign bond yields, S&P Financials Select…