US bond yields soar, Powell hearing today in the US Senate

The yield on 10-year US bonds has risen from 1,51 percent since the beginning of the year. at 1,76 percent Usually, at the beginning of the year, we observe greater volatility in profitability than in other periods. Now, the market is additionally pricing-in the first rate hike expected in March. Today, at 16 PM Polish time, Jerome Powell's hearing in the US Senate will begin in connection with his nomination for the next term.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

Expected rate hikes

The increase in the yield on 10-year US bonds at the beginning of the year is similar to the situation observed a year ago. Then, in the first quarter, the profitability increased by as much as 0,8 pp. Now, from the beginning of the year, the increase has been 0,25 pp (an increase from 1,51% to 1,76%). The market is valuing the expected market in this way
on March 16 (with a probability of 70 percent) the first raise interest rates in Usa. Markets estimate that there may be three rate hikes this year. AND FED the expected termination of the asset purchase program will also accelerate.

What did the last year's increase in bond yields bring? First of all, much better results (by 10%) of dividend companies (value) than of growth companies. This division of companies is very popular in the financial market. Value companies are those that generate greater positive cash flows, but grow more slowly, and investing in them is associated with lower risk. Growth companies are those that strongly increase sales and focus on rapid growth. Usually it requires external financing, so their results are more dependent on the price of capital. So when bond yields rise, these firms must face higher financial costs. The last decade has definitely belonged to growth companies on the stock exchanges, due to very cheap financing and zero interest rates in the world. Now this trend is slowly changing.

However, if we look at the real bond yield (bond yield after subtracting inflation), it is currently -5%. This is the lowest level in 50 years, lower than inflation in the 70s. Moreover, negative real interest rates are not only a property of the USA, a similar phenomenon is observed in the EU (-5%), Great Britain (-5,5%) and also in Poland (-6,05%).

Powell's questioning in focus

Today, the market will focus on the hearing of Jerome Powell in the US Senate at 16 PM Polish time, related to his appointment for the next term of office as the head of the Fed. On Thursday, at the same time, the candidate for the deputy head of the FED, Lael Brainard, will be interviewed. Both hearings will focus on the issue of the Fed's policy on inflation and the rising cost of living in Americans in the coming months. A majority in the Senate is required to confirm each candidature. Which is likely to happen despite opposition from some Democrats, who are expecting candidates for tougher bank policies and more focused on tackling climate change.