After the U.S. 10-year Treasury yield burst through the 1% mark last week, investors are wondering what the future may hold for the benchmark maturity.
On one hand, a handful of market participants fear an aggressive fiscal agenda from the incoming administration of Joe Biden could put the bond-market on the precipice of a disorderly selloff in the magnitude of the 2013 ‘taper tantrum,’ but others argue long-term Treasurys are unlikely to see a sharp increase due as the Federal Reserve is unlikely to change its pace and scale of asset purchases this year.
Despite the variety of opinions over the eventual destination for government bond yields, the consensus is they will ultimately rise as the economy recovers from the coronavirus pandemic with the help of historically large fiscal and monetary policy stimulus.
“Yields are going to be higher but not massively higher,” said Rob Daly, director of fixed income at Glenmede Investment Management, in an interview.
The 10-year note
has risen as high as 1.187% on Monday, around 26 basis points higher than where it started at the end of last year, but has since pulled back to 1.09% following a string of successful Treasury auctions earlier this week.
Still, this rapid climb within the span of two weeks has led Wall Street banks scrambling to raise their bond yield targets for the end of 2021.
The Wall Street Journal’s periodic survey show economists on average held a year-end forecast of 1.44% for the 10-year Treasury.
Similarly, traders are now pointing to 1.5% as a line in the sand that if surpassed before could see bond yields extend their surge.
There are two other levels to watch before markets hit that threshold, says Tom Di Galoma at Seaport Global Securities. He pointed to 1.2% and 1.35% as key resistance levels for the 10-year note.
Yet many were pessimistic the benchmark bond could exceed that ceiling, as domestic and overseas investors have already shown appetite for Treasurys at current yields, judging buy the success of weekly auctions to fund the U.S. fiscal deficit, with yields in other developed countries still near zero or negative.
Senior Fed officials have also signaled they would keep monetary policy accommodative for the foreseeable future. Fed Vice Chairman Richard Clarida said the central bank wouldn’t raise interest rates until inflation stayed at 2% for a year.
HSBC strategist Lawrence Dyer said Wednesday it would be wise to take advantage of the recent bond-market selloff, as Treasurys had priced in too much monetary tightening relative to expectations of the Fed’s policymakers.