Do not rule out a 10-year treasury yield of about 2.25% this year.
This is the message from Michael Schumacher, Wells Fargo Securities, ahead of the Federal Reserve’s interest rate decision on Wednesday.
“The fiscal stimulus is enormous, and vaccine deployment seems to be accelerating quite a bit – not just here in the US,” the firm’s macro strategy told CNBC’s Trading Nation on Tuesday. “A lot of things come together to boost returns.”
Still, Schumacher said his firm doubt Jerome Powell, the chairman of the Fed, would show immediate concern.
“He was pretty scary about the whole increase in returns. We think he will maintain that attitude tomorrow,” he said. “What we see at Wells Fargo is that he will not really try to slow it down.”
Instead, Schumacher said he expects Powell to link rising yields to a vote of confidence in the economic recovery, indicating that it is a catch-up movement for low inflation for such a long time.
“The world has never seen a coordinated reopening like this. Not even after World War II,” Schumacher said. He said he thought Powell would be willing to let inflation run above its 2% target for a while.
In December on “Trading Nation”, Schumacher predicted that Covid-19 vaccines would dramatically increase confidence and increase Treasury returns in 2021. So far this year, the standard yield for ten years is 77% higher. It closed at 1.62% on Tuesday.
“Yields started this year – if you focus on the 10-year treasury – just north of 90 basis points. It has risen by about 70 basis points this year,” he noted. “So, I would say 1.75% to 2%, can happen fast.”
According to Schumacher, the return could be more than 3% by next year. The level could encourage the Fed to raise rates sooner than Wall Street expects: 2022 instead of 2023, he said.
“The biggest risk … is that people underestimate the amount the economy is going backwards,” Schumacher said. “Maybe we’re all actually a little too conservative.”
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