10-year increase in US Treasury yield is “reasonable”

Morgan Stanley said the 10-year increase in Treasury yields is reasonable and reflects growing confidence in the US economic outlook, according to Jim Caron, global investment manager with a fixed income portfolio at the investment bank.

The 10-year Treasury yield jumped more than 1.7% on Thursday, the highest level in more than a year. It came even though the Federal Reserve reassured investors he had no plans to raise interest rates any time soon, nor did he plan to ease his bond-buying program.

The yield on the 30-year treasury bond rose by 3 basis points to 2.472%. Yields move in the opposite direction to prices.

The recent rise in bond yields does not indicate a tightening of financial conditions, according to Caron.

“The way I see it is that, as we stand here at around 1.75%, 1.7% in the 10-year mark, I think this is a reasonable area where we can expect some consolidation,” he said. he said on Friday, referring to how the yield will likely remain in a range, neither continuing much higher nor reversing much.

“Because that’s the level the market was going to reach, with a Fed announcement rather than expected. And that’s what we got,” he told CNBC during Squawk Box Asia.

Following the Fed’s policy meeting on Wednesday, the US central bank said it sees stronger-than-expected economic growth, with gross domestic product expected to rise to 6.5% in 2021. This is higher than forecast growth of GDP of 4.2% forecast in December.

The Fed also expects core inflation to reach 2.2% this year, but has a long-term expectation that it will remain around 2%.

Michael Spencer, chief economist and chief research officer at Asia-Pacific at Deutsche Bank, echoed a similar view, saying it was “completely natural for long-term bond yields to rise”.

“Everyone is extremely strong in US growth. We expect the economy to grow by 7.5% this year,” he told CNBC’s Squawk Box Asia.

“I don’t think what we’ve seen is messy. I think we have to wait until the end of the year, 10-year bond yields will be two and a quarter (percent) or higher.”

The increase in Treasury yields is a reflection of the strong growth rate for the US economy after the recent $ 1.9 trillion coronavirus aid package signed by the Biden administration last month, Caron said. He added that this is likely to increase confidence as the country recovers from the coronavirus pandemic.

“Confidence comes as states reopen, people get vaccinated and infection rates fall. Certainly, all this extra money that is taken out of the aid plan and wage protection programs will be helpful. Trust and consumption – consumption being 70% of GDP, “Caron said.

Caron also downplayed concerns that the tax relief package could lead to higher inflation.

“I don’t know how inflationary this really is. There have been a lot of money prints. However, what we need to see is speed, which means that economic activity is starting to grow to an extent that it is actually creating. and we don’t see that yet, “he remarked.