US 10-year Treasury yield maintains fragile balance on Tuesday after posting biggest decline in several weeks on Monday. The fall from 1.10% to 1.02% were driven by rapidly changing tone of markets expectations about Biden's stimulus bill:

A threat is emerging for equity investors that the US government will approve a stimulus package with size and timing way less stimulative than markets originally hoped for ($2 tn., approved in a 2-4 weeks)

The head of the Senate Democrats, Chuck Schumer, hinted on Monday that Congress will take up the issue no earlier than mid-March-April.

In turn, a series of less optimistic estimates from the US investment banks such as JP Morgan and Goldman Sachs followed regarding the size and timing of the stimulus. This made equity markets much more cautious and drove more demand to fixed income markets including US Treasury markets. In terms of timing, the banks’ analysts were guided by comments from senators (i.e. 4-6 weeks), however estimates of the size of the stimulus package varied. For example, Goldman expects the final aid to be $ 1.1 tn., while JP Morgan made even less optimistic assumption, estimating fiscal support at only $900 bn. That is the same amount of aid that was approved by the US Congress after a long standoff in December.

Just a couple of weeks ago, bank analysts estimated the size of the package at $2 tn.

The major consequence of less than expected stimulus is that the government will need to borrow less, which means the threat of an increase in supply in the Treasury market becomes less strong, which allows investors to be more confident about their price, pushing the yield on the securities down. In addition, due to less fiscal stimulus than anticipated, expectations of rising interest rates and inflation expectations are also weakening, making the existing Treasury payment flows more attractive. Hence the extremely sharp moves in the largest debt market in the world and a rapid shift in expectations that clearly depend on negotiations in Congress on the fresh fiscal deal. In just three weeks, Treasury yield jumped from 0.92% to 1.18% and fell by 1.02%:

The implication for stock markets from this story is of course rising fragility considering equity markets trade near all-time highs.

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