Fynsa
In recent days, bond yields have moved sharply higher and are already above 1.3% for the 10-year benchmark, which has generated some concern that higher interest rates could begin to threaten an equity market that trades at historically high levels. (US case)
Why are bond yields rising? There are multiple variables that could explain this trend:
Now, a review of past rate levels may provide a guide to what to expect.. The major technical resistance over 10 years is at 1.5%. This is because the 1.5% level was the floor for bond yields in the previous cycle. Going back to the post-2008 mortgage crisis world, bond yields tried to break the previous cycle lows over and over again, and failed every time.
Could we see the same thing this time, with bond yields trying to break through the previous 1.5% floor (now resistance)?
Essentially, with the market excited about economic growth and/or a pickup in inflation, yields could reach 1.5%. Now, should the market begin to price in certain risks (Covid variants, political events, geopolitical tensions), bond yields could fall back to 0.5%, a scenario to which we assign a low probability. If this framework is correct, then we could see another 20bp of yield increases, which, on current form, could happen in the very short term, but then the rise in long-term yields is likely to stall. Why?
The Fed no longer sees its main job as fighting inflation. Its primary job is to "create a full employment economy," as Jay Powell reiterated last week. Its secondary job is to ensure that the U.S. government can finance itself at low rates. Price stability is now job number three. That's not the only difference: a year ago, the Fed redefined "price stability" as "average" inflation over extended periods. This suggests that it will be comfortable with inflation above 2% for years to come.
Is the new range for the 10-year treasury bond yield 0.5 - 1.5?
