Morgan Stanley said the rise in 10-year Treasury yields is reasonable and reflects growing confidence in the US economic outlook, said Jim Caron, global fixed income portfolio manager at the investment bank.
The yield on 10-year Treasury bonds jumped above 1.7% on Thursday, the highest level in more than a year. It came though the Federal Reserve reassured investors it had no plans to raise interest rates in the short term or to ease its bond buying program.
The yield on the 30-year government bond increased by 3 basis points to 2.472%. Revenues move inversely with prices.
According to Caron, the recent rise in bond yields does not indicate a tightening of financial conditions.
“The way I see it is that since we are around 1.75%, 1.7% here in the 10-year note, I think this is a reasonable area where we can expect some consolidation,” said he Friday, referring to how the yield is likely to stay in range, not go much higher or reverse much.
“Because this is the level that the market expected us to reach, on a more moderate than expected Fed announcement. And that’s what we got,” he told CNBC during “Squawk Box Asia.”
Wildly optimistic about US growth
After the two-day Fed policy meeting closed on Wednesday, the US central bank said it sees stronger economic growth than previously projected, predicting gross domestic product to rise to 6.5% in 2021. This is higher than the projected 4.2% GDP growth forecast. in December.
The Fed also expects core inflation to be 2.2% this year, but expects it to remain around 2% in the long run.
Confidence is growing as states reopen, people are getting vaccinated and infection rates are dropping.
Jim Caron
Morgan Stanley, global fixed income portfolio manager
Michael Spencer, chief economist and chief of Asia-Pacific research at Deutsche Bank, reiterated a similar view, arguing that it is “perfectly normal for yields to rise”.
“Everyone is very optimistic about US growth. We expect the economy to grow 7.5% over the course of this year,” he told CNBC’s “Squawk Box Asia.”
“I don’t think what we’ve seen is disorderly. I think we should expect 10-year bond yields to be two and a quarter (percent) or higher by the end of the year.”
The rise in government bond yields reflects strong growth momentum for the U.S. economy following the recent $ 1.9 trillion coronavirus package signed by the Biden administration last month, Caron said. He added that this is likely to bolster confidence as the country recovers from the coronavirus pandemic.
“Confidence is coming in as states reopen, people are getting vaccinated and infection rates are dropping. Sure enough, all that extra money slipping around from the contingency plan and payroll protection programs will be helpful. Confidence and consumption – consumption is 70% of GDP,” said Caron .
Caron also downplayed concerns that the package could trigger fiscal measures to higher inflation.
I don’t know how inflationary this really is. A lot of money has been printed. What we have to see, however, is the speed, which means that economic activity is really starting to pick up to a level that it actually creates inflation. not, ”he remarked.