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Jerome Powell, Chair of the Federal Reserve, has said that the move in debt markets “caught my attention” but stressed that the bank is looking at a broad range of financial conditions and seemed to allow for yields to further rise. Rates rose after Powell’s remarks, led by the 10y sector and real rates. The 10y hit the highest level since February 2020 and risk assets struggled.  

Economists at TD Securities forecast the 10-year Treasury yield to jump to 2% by end-2021.

Key quotes

“The Fed chair once again struck a dovish tone, but that dovishness does not mean doing something to directly counter the recent rise in bond yields. Instead, it means no rush for tapering or tightening. The chair did say that last week’s bond market moves were ‘notable,’ and ‘caught my attention,’ and that he ‘would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threaten the achievement of our goals,’ but the implication is that bond market action to date is not very concerning.”  

“We believe that the market is pricing in tapering by late 2021 and the first hike in March 2023. This is much earlier than our forecast, but is a challenge for the Fed to push back given their outcome-based guidance and an improving outlook.”  

“We revise our US rates forecasts, looking for 1.75% on the 10y in the near-term and 2% by year-end. We expect a more stable 0-5y sector given the high bar for the Fed to hike rates. We remain long 5s for carry and rolldown, and look to sell 10s on rallies.”