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U.S. And German Yields Will Bear Brunt Of Lockdowns

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U.S.
And German Yields Will Bear Brunt Of Lockdowns
Tyler
Durden
Sat, 11/28/2020 – 10:30

By Richard Jones, macro
commentator at Bloomberg

Increased
pandemic restrictions will serve as a massive economic drag in
Europe and the U.S. in the coming months, leading to material
downside for bund and Treasury yields.

Stocks
have rallied this month on vaccine optimism and reduced U.S.
political uncertainty. Yet bonds’ reaction on both sides of the
Atlantic have been much more circumspect. While the Stoxx
600 and S&P 500 have posted double digit percentage
gains, the 10-year UST yield is unchanged and the corresponding
bund yield is only 5bps higher, suggesting virus
concerns are more in play.

By year-end,
given existing partial lockdowns, the 10-year German
yield can revisit the -0.67% low seen on Nov. 4.
The 10-year UST can trade back down to 0.72%, the Nov. 5
low.

The pandemic is worsening in the
U.S. and Europe, and the resulting economic drag will become more
evident in the coming weeks and months. Active Covid-19
cases in Germany have almost tripled in the past
month. In France, cases have doubled, and in the
U.S. they have increased by 50%. With this rapid acceleration,
governments have enacted partial lockdowns —
and extended them in Germany.

And with
the temptation to relax regulations, it is not
unreasonable to fear a further spike in cases over the next month
or so at a time when health systems are already
stressed.

Business and consumer sentiment
is already souring and layoffs rising. Should rising
caseloads and stretched resources lead to even tighter restrictions
in 2021, the all-time lows in the 10-year UST (0.31%) and bund
(-0.91%) yields could easily be revisited.

This
is especially possible given fiscal stimulus efforts in the U.S.
and euro area have stalled with two U.S. unemployment-insurance
programs set to expire.

With the make-up of
the U.S. Senate still up in the air, it is uncertain how much
pandemic aid can be implemented by the incoming Biden
administration. Any package will likely be less expansive than the
previous initiatives, and may still be several months
away.

The European Union recovery program, once
hailed as a game-changer, has run aground on political
infighting between member states. With negotiations ongoing,
the disbursement of funds will be delayed beyond the envisioned
starting point at the turn of 2021.

The lack of
an aggressive fiscal impulse will leave the ECB and Fed to pick up
the stimulus slack required by economies over the winter. To be
sure, restrictions may get the virus under control heading into
2021 and fiscal stimulus might yet be implemented soon. Failing
these eventualities, the pandemic’s economic drag opens up a lot of
downside for German and U.S.
yields.


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