Don’t rule out a yield on 10-year Treasury bonds as high as 2.25% this year.
That is the message from Wells Fargo Securities’ Michael Schumacher, ahead of the Federal Reserve’s interest rate decision on Wednesday.
“The fiscal stimulus is huge, and the roll-out of vaccines appears to be accelerating quite a bit – not just here in the US,” the company’s macro strategy chief told CNBC’s Trading Nation Tuesday. “A lot of things are coming together to boost yields.”
Still, Schumacher said he has strong doubts that Fed Chairman Jerome Powell will show immediate concern.
“He has been quite optimistic about the whole revenue increase. We think he will hold that attitude tomorrow,” he said. “Our opinion at Wells Fargo is that he’s not really going to try to slow it down.”
Instead, Schumacher said he expects Powell to link rising interest rates to a vote of confidence in the economic recovery and that he indicates that it is catching up because inflation has been low for so long.
“The world has never seen such a coordinated reopening. Not even after World War II,” said Schumacher. He said he thinks Powell will be willing to keep inflation above the 2% target for “for a while”.
In December on “Trading Nation”, Schumacher predicted that Covid-19 vaccines would dramatically boost confidence and boost government bond yields in 2021. So far this year, the benchmark 10-year return is up 77%. On Tuesday it closed at 1.62%.
“Interest rates started this year – if you focus on the 10-year Treasury – just north of 90 basis points. It’s up about 70 basis points this year,” he noted. “So 1.75% to 2%, I would say, could happen pretty quickly.”
Next year, Schumacher said, yields could exceed 3%. That level could prompt the Fed to hike rates earlier than Wall Street expects: 2022 instead of 2023, he said.
“The biggest risk … is that people will underestimate the extent to which the economy is recovering,” said Schumacher. “Maybe we’re all a bit too conservative.”
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