[Good Morning Stock Market] US Treasury Yields Burden Market... "Focus on January FOMC Meeting Outcome"

US 10-Year Treasury Yield Rises Intraday to 1.18%
Reflects Economic Improvement Hopes and Rising Expected Inflation Rate

Attention on January FOMC for Signals to Curb Sharp Rate Increase
Fed Policy Shift Expected if 2-Year Treasury Yield Also Rises

[Asia Economy Reporter Minji Lee] As the yield on the US 10-year Treasury rapidly rises, tension is spreading across the stock, bond, and foreign exchange markets. This is because the increased 10-year Treasury yield, driven by growing concerns over inflation, is putting pressure on the financial markets.

With rising worries about a shift in the US Federal Reserve's (Fed) policy stance, experts expect the Federal Open Market Committee (FOMC) meeting scheduled for the 26th and 27th to play a crucial role in the market.

[Image source=Yonhap News]

◆ Sangyoung Seo, Kiwoom Securities Researcher = The US stock market appears to be influenced by changes in Treasury yields. The US 10-year Treasury yield has been sharply rising since the Democrats formed a Blue Wave by controlling the White House, Senate, and House of Representatives. This is due to increased expectations for additional stimulus measures and economic improvement, as well as a rise in expected inflation rates. When some Fed officials mentioned the need to 'recalibrate' bond purchases, the market reacted sensitively.

The rise in yields negatively affects the stock market by increasing the discount rate applied to future cash flows. As the 10-year Treasury yield approached 1.2% intraday and continued to rise, selling pressure emerged mainly in technology and pharmaceutical stocks. However, as Treasury yields stabilized before the market close, growth stocks centered on technology and pharmaceuticals quickly rebounded. This was due to a rebound sentiment following the sharp rise in yields and positive news from Treasury auctions. Furthermore, some Fed officials stated that changes in monetary policy are unnecessary until a sustainable economic recovery is achieved, noting that while inflationary pressures may spread, it is too early to expect policy changes. This also contributed to the stabilization of yields.

◆ Sanghyun Park, Hi Investment & Securities Researcher = As the influence of Treasury yields on the stock, bond, and foreign exchange markets expands, the importance of the FOMC meeting is increasing. With the Biden administration backed by the Blue Wave taking office and the distribution of COVID-19 vaccines, whether the Fed will revise its economic outlook upward is expected to be a key variable affecting further rises in market interest rates. Additionally, there is interest in whether the US Fed will signal to the financial markets about policy tools to control the risk of further sharp increases in market interest rates.

The question of whether the US dollar will strengthen further is also expected to be a critical short-term turning point influenced by the FOMC meeting. If the Fed signals policies that could induce a moderate additional rate hike, the dollar's strength is expected to be limited.

Another aspect to watch closely is the trend of the 2-year Treasury yield. As of the closing price on the 12th, the US 2-year Treasury yield stood at 0.1449%, rising only 2 basis points (1bp=0.01%) compared to the end of last year. This shows relative stability compared to the 10-year Treasury yield, which rose 21 basis points during the same period.

The fact that the 2-year Treasury yield remains stagnant while only the 10-year yield rises, widening the long-term and short-term spread, can be interpreted not as a strong expectation for US economic growth but rather as a significant effect of expanded additional stimulus policies and inflation expectations following the Blue Wave. In conclusion, if the 2-year Treasury yield also expands its rise after the FOMC meeting, it would indicate a reaction to the possibility of a Fed policy shift driven by strengthened expectations for US economic recovery. Conversely, if stability is maintained, it can be inferred that there will be little change in the policy stance.