Do not rule out a 10-year Treasury yield of up to 2.25% this year.
That’s the message from Wells Fargo Securities’ Michael Schumacher ahead of Wednesday’s Federal Reserve interest rate decision.
“The fiscal stimulus is enormous, and the launch of the vaccine seems to be accelerating quite a bit – not just here in the US,” CNBC’s head of macro strategy for Trading Nation said on Tuesday. “A lot of things come together to push yields up.”
However, Schumacher said his firm doubted Fed Chairman Jerome Powell would show immediate concern.
“It was pretty bloody about the whole increase in yields. We think it will maintain that position tomorrow,” he said. “Our view at Wells Fargo is that he won’t really try to slow it down.”
Instead, Schumacher said he expects Powell to associate rising yields with a vote of confidence in the economic recovery and to point out that it is a recovery move because it has had low inflation for so long.
“The world has never seen a coordinated reopening like this. Not even after World War II,” Schumacher said. He said he believes Powell will signal a desire to let inflation exceed the 2% target for “a while”.
In December, “Trading Nation”, Schumacher predicted that Covid-19 vaccines will dramatically increase confidence and increase Treasury yields in 2021. So far this year, the 10-year benchmark yield has increased by 77%. It closed at 1.62% on Tuesday.
“Yields started this year – if you focus on the 10-year Treasury – north of 90 basis points. It has risen by about 70 basis points this year,” he noted. “So from 1.75% to 2%, I’d say, it could happen pretty quickly.”
By next year, Schumacher said, the yield could exceed 3%. That level could cause the Fed to raise rates earlier than Wall Street anticipates: 2022 instead of 2023, he said.
“The biggest risk … is that people underestimate the amount the economy returns,” Schumacher said. “Maybe we’re all a little too conservative.”
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