Yields continue to rise.
The ten-year Treasury yield remained close to the 14-month highs on Friday, above 1.7%, while the 30-year yield stood above 2.5%.
The bond market was under surveillance after the Federal Reserve decided not to extend a rule that would loosen the additional leverage ratio for banks, which could lead them to unload some of their Treasury holdings and further increase yields.
But PGIM’s chief fixed-income economist Nathan Sheets says the Federal Reserve believes higher rates are a good development for now.
“The Fed sees the rise in interest rates that occur along the curve reflect expectations of higher inflation, which is what the Fed has been trying to offer for several years now along with expectations of a strong recovery “. Sheets told CNBC’s “Trading Nation.” “I think [Fed Chair Jay Powell is] very excited about it … as long as the rise is proportional to the improvement in the economic outlook “.
Sheets, former Secretary of the Treasury for international affairs, said a 2% yield on the 10-year Treasury is a “reasonable assumption” that markets are setting prices in the short term, but sees no evidence that the increase of yields decrease.
That could become a problem for the bond market and the Fed beyond this year, he said.
“We will have a powerful recovery during the second half of this year, with a lot of taxation [stimulus] and the return to normalcy as a result of the vaccination campaign, but how much demand will be left in relation to supply, aggregate supply, say, in the middle of next year? And I think there are some serious questions as we get beyond the near term, ”he said.
Treasury yields are often seen as a barometer of inflation expectations, because when investors expect higher inflation, bonds become less attractive and are sold, while yields increase, which is inversely related to inflation. bond prices.
“As we reopen, we are likely to see some price pressures, people will demand goods and services and the supply of these may stay a bit and could create bottlenecks and shortages in some sectors, but the key question I think the markets are debating is what does this look like after moving to 2022. Does higher inflation persist? … Or, is it coming out of the boil? Is it transitory? ”Fulls said.
The Fed said Wednesday it expects core inflation to rise 2.2% this year, but drop to 2% in 2022. Powell said the Fed will tolerate a “transient rise in inflation above 2%” without change its monetary policy.
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