Yields on 10-year Treasuries to rise to approximately 1.6% – Charles Schwab

The new year started with a sharp rise in Treasury yields, despite unprecedented political turmoil and signs that the economic recovery is slowing. The recent rise in yields may be too much, too soon, but the overall direction of yields is likely to remain upward, according to Kathy Jones of Charles Schwab.

Key statements:

“The pace of vaccine distribution is accelerating, raising hopes for a stronger recovery, even amid a staggering increase in cases. Additionally, the incoming Biden administration has emphasized the need to control the pandemic as its top priority. Plans include using federal resources to help fund a coordinated distribution effort. Anything that speeds up the vaccination process should help boost the economy. ”

“The new administration seems more focused on job growth as a measure of success than on the performance of the stock market. Consequently, substantial fiscal stimulus is likely to be pushed through. Janet Yellen, the nominee for Secretary of the Treasury, has already indicated that she will focus the department on helping small businesses. As a former Fed chairman, Yellen is in a particularly strong position to coordinate fiscal policy with monetary policy. In 2021, the expansionary fiscal and monetary policy mix will likely drive a continued rise in inflation expectations”.

“Broadly weighted by trade, the dollar is down roughly 15% from its peak in March. A weaker dollar tends to boost growth by making US exports more competitive and raising inflation by raising import prices. Commodity prices, which are priced primarily in dollars, tend to rise when the dollar falls, fueling inflation. The recent rise in commodity prices has coincided with the fall of the dollar. “

“COVID-19 cases continue to rise and mobilization to widely distribute the vaccine will take time. Similarly, many sectors of the economy continue to struggle due to falling demand and high debt. Furthermore, there are still more than 9 million fewer people employed now than a year ago. With so much idle excess capacity in the economy, inflation is likely to remain low for the next two years despite rising expectations. Our longer-term expectation for 2021 is for 10-year Treasury yields to move to about 1.6%.“.