The new year kicked off with a sharp rise in Treasury bond yields, despite unprecedented political turmoil and signs that the economic recovery is slowing. The recent move up in yields may be a bit too much, too soon, but the overall direction in yields is likely to remain higher, according to Kathy Jones from Charles Schwab who lays out three factors driving bond yields up.
Key quotes
“The pace of vaccine distribution is picking up which has raised hopes for a stronger recovery, even amid a staggering rise in cases. Moreover, the incoming Biden administration has emphasized the need to get the pandemic under control as its top priority. Plans include employing federal resources to help fund a coordinated distribution effort. Anything that speeds up the vaccination process should help boost the economy by making it safer for people to congregate and resume activities that have been shelved.”
“The new administration appears more focused on job growth as a measure of success than stock market performance. Consequently, it’s likely that there will be a push for substantial fiscal stimulus. Janet Yellen, the nominee for Treasury secretary, has already indicated she will focus the department on aid to small businesses. As the former Fed chair, Yellen is in a particularly strong position to coordinate fiscal policy with monetary policy. In 2021, the combination of expansive fiscal and monetary policies will likely fuel a continued rise in inflation expectations.”
“On a broad trade-weighted basis, the dollar has fallen by about 15% from its peak level in March. A weaker dollar tends to boost growth by making US exports more competitive and raise inflation by pushing up import prices. Commodity prices, which are largely priced in dollars, tend to rise when the dollar falls – fueling inflation. The recent rise in commodity prices has coincided with the drop in the dollar.”
“COVID-19 cases are still rising, and mobilizing to distribute the vaccine more broadly will take time. Similarly, many sectors of the economy are still struggling due to falling demand and high debts. Also, there are still more than 9 million fewer people employed now than a year ago. With that much excess capacity in the economy, inflation is likely to remain low for the next year or two despite rising expectations. Our longer-term expectation for 2021 is for 10-year Treasury yields to move up to about 1.6%.”
Share
