It’s been an eventful first few days of trading in the new year. Most notably, the yield on 10-year Treasuries moved above 1% for the first time since the economic collapse in March, and following the runoff elections in Georgia on Tuesday that gave control of the Senate to Democrats.
Yields broke past 1% overnight and traded in a range on Wednesday. They did not move sharply following the civil unrest in Washington. We expect the 10-year yield to end the year at 1.29%, which is up from 1.073% at the time of this writing.
There have already been hints that yields were poised to move higher as confidence in the vaccine and an economic recovery grew, despite the troubled rollout of the vaccine. Once it is widely distributed, we anticipate that growth will average above 5% in the second half of 2021, which will cause yields along the 2-10 maturity spectrum to rise.
Though smart use of government spending will bring about economic growth that would support higher interest rates, there will undoubtedly be those who argue that the market is worried about the debt needed to finance additional fiscal spending.
We think that the United States has plenty of fiscal space to address its needs and can do so without causing rates or inflation to surge. However, with the Federal Reserve maintaining a policy rate of zero and purchasing $120 billion per month in assets, it is certain that the long end of the curve will remain damped this year.
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