After increasing significantly in the first quarter of this year, long-term Treasury yields have slipped back a bit this month. The 10-year yield, for example, which increased by ~80bp in Q1, has since fallen by ~20bp. Nevertheless, economists at Capital Economics don’t see a fundamental argument for lower long-term yields, and think that they will resume their rise before long.
The recent fall in long-term Treasury yields will not persist
“Very rapid economic growth is on the way this year and next. We think the stage is set for a significant pick-up in inflation in the near-term, perhaps even more than is currently discounted in markets. And this may cause investors to factor in a tighter stance of policy further down the line, even if they believe the Fed when it suggests it is in no rush to tighten over the next couple of years. We expect this to help push up long-term real yields over the next couple of years.”
“We are sticking with our projections for the 10-year US Treasury yield. We forecast it to reach 2.25% and 2.50% by end-2021 and end-2022, respectively, compared with its current level of ~1.6%.”
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