As the Fed is ready to make its rate decision, Wells Fargo predicts the 10-year return could reach 2.25% this year
Don’t rule out a 10-year Treasury note return of 2.25% this year.
This is the message from Michael Schumacher of Wells Fargo Securities ahead of the Fed’s rate decision on Wednesday.
“The fiscal incentives are huge and the introduction of vaccines seems to be accelerating quite a bit – not just here in the US,” the company’s head of macro strategy told CNBC’s “Trading Nation” on Tuesday. “Many things come together to increase returns.”
Still, Schumacher said his firm doubts that Fed Chairman Jerome Powell will show immediate concern.
“He was pretty confident about the overall increase in earnings. We believe he will maintain that stance tomorrow,” he said. “Our view at Wells Fargo is that he’s not really going to try to slow it down.”
Instead, Schumacher reckons Powell will associate rising yields with a vote of confidence in the economic recovery, suggesting that if inflation has been so low, that’s catching up.
“The world has never seen such a coordinated reopening. Not even after the Second World War,” said Schumacher. He said he thought Powell would signal a willingness to let inflation run above its 2% target for “a while”.
In December, Schumacher predicted on Trading Nation that Covid-19 vaccines would dramatically boost confidence and raise government bond yields in 2021. So far, the benchmark return for 10 years has risen 77% this year. On Tuesday it closed at 1.62%.
“Returns started this year – if you focus on the 10-year Treasury – north of 90 basis points. This year it’s about 70 basis points.” “So, 1.75% to 2%, I would say, could happen pretty quickly.”
By next year, said Schumacher, the return could rise above 3%. Those levels could cause the Fed to hike rates sooner than Wall Street expects: 2022 instead of 2023, he said.
“The biggest risk … is that people will underestimate the amount by which the economy will recover,” said Schumacher. “Maybe we’re all a little too conservative.”
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