Janet Yellen shares the views of Jerome Powell on the rise in US government bond yields. Its method of measuring the value of debt is moving in the opposite direction. Interest payments on the national debt fell last year to $ 345 billion or 1.6% of US gross domestic product. Debt servicing is expected to decline even further in 2021, even with all the costs associated with the pandemic.
Given the current sell-off in 10-year Treasury bonds, the observed current yield level - the highest in more than 12 months - suggests that this is far from the end, but only the beginning of the movement. Janet Yellen said that the government used to service higher debt and there were no problems with this. For the US to seriously think about the high level of government debt, the yield on treasury bonds should return to its average value of around 2.5% - and this is much higher than it is now. However, even in this case, the cost of servicing the US debt will be held in a comfortable mode.
All of this helps explain why President Joe Biden's administration, which just passed a $ 1.9 trillion pandemic relief bill through Congress, is trying to push new initiatives worth trillions of dollars soon. The money is planned to be used for infrastructure development and industrial growth. It is expected that by the time bond yields rise to the average level, investors will increasingly return to the US dollar, thereby allowing the US to borrow in the debt market as much and in the volumes that are needed. Another point is the tax reform, which will seriously increase budget revenues.
Let me remind you that the Federal Reserve's monetary policy decision will be published today. At the time of writing, the yield on 30-year Treasury bonds has risen to a level not seen since 2019, and the yield on 10-year bonds has stopped at around 1.67%. Market inflation expectations are at the highest level in 12 years, which allows the US dollar to continue to grow against the world's major currencies.
The Federal Open Market Committee is likely to keep interest rates near zero at the end of its two-day policy meeting. The bond-buying program, which amounts to $ 120 billion a month, is expected to remain unchanged. However, as noted above, expectations of a strong economic recovery after the downturn due to COVID-19 shift the focus to the expectations of the Fed representatives on interest rates in the future. Many economists predict that the Fed will still signal a planned change in its policy no earlier than 2023, although several Fed leaders may revise their forecasts for an earlier date – this is exactly what we need. The further direction of the US dollar will depend on this.
Moving away from the topic of interest rates, it is necessary to pay attention to today's speech by the President of the European Commission, Ursula von der Leyen. She again raised the issue of exporting the vaccine, threatening to suspend it to the UK, thereby increasing disagreements with the British government. Let me remind you that the European Union is looking for a solution to its slow vaccination program against COVID-19. Von der Leyen said the bloc would consider blocking supplies to countries that do not reciprocate or that already have high vaccination rates. She singled out the UK as the biggest importer of the vaccine from the EU.
"In the last six weeks, 10 million doses have been exported to the UK," von der Leyen told reporters in Brussels. "Although AstraZeneca's vaccine is produced in the UK, the supply volumes are quite small, and the company is not fulfilling its obligations to supply the vaccine to the region in the required volume."
As for the technical picture of the EURUSD pair, it has not changed at all compared to the morning forecast. It all depends on the level of 1.1885 and the decisions made today by the Federal Reserve System. If this range is broken, the pressure on risky assets will increase significantly, which will lead the pair to new lows in the area of 1.1835 and 1.1750. It will be possible to talk about a break in the downward momentum only after the bulls break above the resistance of 1.1990, which will lead to a new wave of growth in the area of the highs of 1.2050 and 1.2110.
As for today's figures, they did not lead to market changes, as expected. A report from Eurostat said that eurozone consumer prices rose for the second month in a row in February this year. The consumer price index jumped 0.9% year-on-year. A year earlier, the indicator is at the level of 1.2%. Core inflation, which excludes energy, food, alcohol, and tobacco prices, fell to 1.1% from 1.4% in January. Compared to the previous month, consumer prices rose by 0.2% in February.
Today, a report from the US Department of Commerce was also released, which indicated a decrease in the volume of new housing construction in the US in February this year. The report said home construction fell 10.3% to 1.421 million a year, after falling 5.1% in January. Economists had expected housing construction to decline by only 0.9%, to 1.565 million.
