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Interest rates have been in a holding pattern over the past month. Short-term rates remain anchored near zero by Federal Reserve policy, while 10-year Treasury yields have traded between 1.5% and 1.7% despite signs of strong growth and rising inflation concerns. Economists at Charles Schwab see this as a pause in the upward trend in yields rather than the start of a reversal for three reasons.

Real yields aren’t reflecting the strong economic outlook

“The global recovery should pick up in the second half of the year as more widespread vaccinations allow economies to open. Bond yields in other major developed countries will likely move higher as economic momentum picks up. In the second half of the year, improving growth should lead to rising global yields, potentially pulling US yields higher as well.”

“Fiscal and monetary policies are supportive for growth and inflation. The American Rescue Plan should continue to influence consumer spending and aid small businesses and state and local governments. With the pick-up in activity, yields are likely to keep rising.”

“Real interest rates are steeply negative, which isn’t consistent with such strong economic growth prospects. Inflation expectations are rising faster than nominal yields, resulting in negative real yields. Assuming the Fed achieves its 2-2.5% inflation target, nominal yields should rise to at least that level.”

 

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