There’s nothing that whips Wall Street into a frenzy quite like a sharp move higher in U.S. Treasury yields.
For instance, consider this Bloomberg News headline from last Wednesday, when the benchmark 10-year yield touched 0.96%: “Treasury Yield Spike Risks Sparking Domino Effect in Markets.” Investors saw the possibility that stocks would be “vulnerable to a reasonably significant correction,” that the price of gold could stumble and that the dollar might weaken from an already two-and-a-half year low. All this, even though current long-term U.S. yield levels would have been unprecedented just 10 months ago and barely register as a blip on a chart of recent history.
So far, there’s little sign of a ripple effect like the ones in previous years. On Friday, the 10-year yield jumped to as high as 0.9842%, closer to 1% than any time since March, after a middling November jobs report. Stocks nevertheless advanced to record highs.
The sanguine reaction is in no small part because traders expect the Federal Reserve to quickly clamp down on any large and sustained increase in long-dated Treasury yields, which influence everything from mortgages to auto loans to borrowing costs for heavily indebted corporations. Some strategists suggest the central bank will announce such a move to tame the bond market on Dec. 16 by extending the weighted average maturity of the $80 billion in Treasuries it purchases each month. That’s not quite yield-curve control in its purest form, but it effectively sends the same message: We won’t tolerate a selloff of this magnitude.
Is a 10-year Treasury yield of about 1% enough to spook the Fed into action? The answer may depend on which bank’s forecast for 2021 you trust.
I wrote last month about Goldman Sachs Group Inc.’s prediction for next year, which is for a modest increase in 10-year yields to 1.3%. JPMorgan Chase & Co. expects the same. Barclays Plc forecasts the 10-year yield to rise to just 1.25% by the end of 2021, while BMO Capital Markets expects it to hit that mark “at some point” next year, but investors will view it as “an enticing opportunity” to buy. Morgan Stanley sees 1.45% at the end of 2021. Bank of America Corp. says 1.5% for the 10-year note, while the long bond will reach 2.4%, leaving the curve from five to 30 years at the steepest since early 2014.
This would seem to suggest that Treasury yields still have room to run before the Fed would intervene, particularly given that interest rates are increasing because of the prospect of fiscal aid in the short term and a potentially supercharged economy next year. Most bank strategists are forecasting a slow and gradual build to those end-of-2021 levels. In that sense, the world’s biggest bond market is right on track without the central bank doing anything differently.
Meanwhile, the median forecast among 53 analysts surveyed by Bloomberg is for the 10-year yield to end 2021 at 1.15%. TD Securities is among those who expect yields will be lower a year from now, calling for 0.9% for the 10-year note and 1.65% for the 30-year bond. “If monetary policy is now shifting to a role more akin to [yield-curve control], this limits the rise in yields but is not looking to depress them further,” TD strategists wrote in a Dec. 2 report.
The bank’s strategists expect the Fed to announce it’s extending the maturity of its bond purchases in December to achieve this balance: