Although we think that markets are still over-estimating the potential for additional large-scale fiscal stimulus this year, the Democrats’ unexpected victories in both Georgia Senate run-off elections has undoubtedly shifted the balance of risks a little, as has the Republican party’s descent into near civil war. Under those circumstances, the resulting rise in longer-term Treasury yields is understandable, particularly when the Fed appears to be in no rush to expand the pace or composition of its asset purchases. Nevertheless, we still think that the Fed would step in with enhancements to its asset purchases to prevent a more significant rise in yields, particularly with the economy still in such a fragile state, illustrated by the renewed decline in employment in December.
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