After a rapid rate hike in early 2022, investors see the 10-year benchmark yield rising to 2% soon
People walk past the New York Stock Exchange in the Manhattan borough of New York, November 10, 2020.
Carlo Allegri | Reuters
The bond market is signaling that interest rates are about to rise on Main Street.
Treasury yields are pushing higher at their fastest new-year pace in 20 years. Benchmarks are closely watched 10 year treasury Yields were as high as 1.71% on Tuesday, after ending 2021 at 1.51% on Friday afternoon.
The 10-year yield is important because it affects the interest rates on mortgages and many other business and consumer loans. When bonds sell off, yields or interest rates move higher.
“The year has really started off with a bang here,” said Robert Tipp, head of global bonds and forex for PGIM Fixed Income. “The market is bouncing back amid the downside risks to the economy from Covid … and then ping-pong coming back from the other side, which is that the economy continues to do pretty well. Inflation is high and the Fed is on a bullish run.”
The Federal Reserve clears the way for higher interest rates in December when it forecast a three-quarter point rate hike next year and said it would now end its bond-buying program in March, rather than June. The Fed joins other central banks around the world in tightening policy, including the Bank of England raised interest rates.
“I think the economic optimism amid inflation concerns will drive 10-year yields to 2% in the first quarter,” said Ian Lyngen, head of US rate strategy at BMO. . The economy and the Federal Reserve will determine how high it is from there. “
But after surging to 2%, strategists do not expect yields to rise sharply this year.
“It’s going to be a function of the data and it’s going to be a function of the tone from the Fed. That said, we’re not going to 3%,” Lyngen said. “I think we’ll peak early in the year.”
Fed’s mid-December meeting just days after report on Consumer price index in November, showing inflation rising at a 6.8 percent pace, the fastest since 1982.
But instead of moving higher on the Fed news, bond yields continue to trade lower as investors buy Treasuries as a safe-haven if the Covid omicron variant slows the economy. But those concerns were allayed when studies showed that the rapidly spreading strain of the virus was not as severe as the number of hospitalizations and deaths.
The 10-year yield spike in one day on Monday was the biggest gain According to Michael Schumacher, director of rate strategy at Wells Fargo, it will be the first trading day yield since 2001. In 2001, yields rose 24 basis points, or 0.24%. On Monday, yields jumped from Friday’s 1.51% to just over 1.64%, according to TradeWeb.
Schumacher said the move could happen early in the year, and in the first weeks of January, there could be several catalysts. The Fed releases the minutes of its last meeting on Wednesday afternoon and the December jobs report is due on Friday. Next week, December CPI is reported and it may again show a very hot pace of consumer inflation.
But while Schumacher doesn’t expect the 10-year forward to be much higher than 2.25% this year, the inflation picture could determine where it will go. “There is always the possibility that inflation is hard to quell and the Fed and other central banks have to be more aggressive,” he said.
In the plan of things, the rate is still very low. The 30-year mortgage rate is currently at 3.22%, up from 3.16% on Dec Bank rate.
Yields have moved higher across the curve. The 2 years Yields, which are most directly affected by Fed policy, are up slightly from Friday’s levels. It actually fell to 0.75% on Tuesday from a high of 0.80% on Monday.
Tipp said interest rates at the long-term end, like 10 years, have historically been driven by longer-term expectations about the economy. But since the 2008 financial crisis, 10 years have mostly yielded less than 3% returns. It last closed above 2% on July 31, 2019.
“Long-term rates are also being hit harder, not so much by what people assume are long-term growth prospects and inflation, but almost as important as what people think are bank policy. central bank,” said Tipp. Tipp said that while the expectation on Wall Street is for the 10-year yield to stay just above 2% by year-end, he expects it to be at 1.50% or lower as he anticipates a slower economy and inflation. emitter is still hot.
Tipp said he does not expect the rate hikes to have as much of an impact on the economy as in the past. “The movement of the exchange rate is decreasing day by day,” he said.
Inflation could be the final driver of 10-year yields this year.
“The final tone at the end of the year will be a function of assessing whether inflation has moderated sufficiently and, importantly, what will happen to growth expectations next year,” Lyngen said.
