Jones said she expects the 10-year Treasury to peak at about 3.25 percent.
“We don’t see a lot more upside than that for this cycle,” she said. Jones said Schwab is projecting the inflation rate to be about 2 percent a year.
What could change that?
The unanswered question is what is the potential for a tariff war. More tariffs could push up inflation rates and interest rates, adversely affecting bond prices and the economy, Jones said, speaking on the same day Trump ratcheted up tariffs against Chinese imports.
Although she thought it was unlikely that Chinese investors would suddenly start selling U.S. Treasurys, American tariffs could lead to “a tit for tat problem.” Jones argued that would necessarily mean Chinese tariffs, but result in other kinds of actions that would impact the economy.
“What it they (the Chinese) restrict what products they sent here? What if, Jones added, “they took retaliatory measures against U.S companies based in China?”
All of this could drive up prices in the U.S., hurting bond markets.
What is the effect of huge deficits on rates?
“In the short run, not much,” Jones said, because interest rates are still low. However, noting that debt rates are at historic highs—105 percent public debt to GDP—there could be some long-term problems.
“In the longer term, you have to finance it with debt issue. And you get to a certain level and investors are going to demand higher and higher yields and that could crowd out the private sector,” Jones said.