Athey sees expectations for 2021 as “overly optimistic”—with regard to economic growth and virus containment—and said he’d be a buyer if 10-year Treasury yields rise sharply again. They reached as high as 1.19% this month, the highest since the pandemic escalated across the country in March, but have fallen back a few points.
‘False Economy’
Ten-year breakeven rates, which measure the gap between yields on inflation-protected Treasury debt and the ordinary type, have climbed to the highest since 2018 at around 2.1%. Like other forms of protection against inflation, they’ve been attracting investors. JPMorgan Chase & Co. strategists are warning buyers that they shouldn’t expect to get rich quick.
“Breakevens, steepeners and gold are still appropriate inflation hedges for an inflation cycle that could break out of 20-year ranges eventually,” they wrote in a Jan. 15 note. But they’re unlikely to deliver large returns in the next year or two, when slack in the economy will cap any rise in core inflation to “a few tenths of a percent.”
If that kind of small increase no longer spurs Fed officials into tightening, one reason is the lessons learned after the 2008 financial crisis. Policy makers have broadly concluded that they withdrew support too early back then—and are now inclined to err on the side of keeping the spigots open too long.
A similar attitude also applies to government spending, seen by the Fed as crucial for economic recovery and reflation. The point was made this week by Janet Yellen, who was in charge of monetary policy as Fed chair last decade and is now set to steer fiscal policy as Biden’s Treasury Secretary.
“We can afford what it takes to get the economy back on its feet, to get us through the pandemic,” Yellen told the Senate Finance Committee on Tuesday. “It would be a false economy to stint.”
This article was provided by Bloomberg News.