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The 10-year U.S. Treasury yield is likely to hit 2% by the end of the year but could spike “well above” that in the second quarter, according to ING senior rates strategist Antoine Bouvet.
Bouvet told “Street Signs Europe” on Wednesday that the envisaged re-opening of the economy in the second quarter, when it’s hoped the vast majority of the U.S. population will be vaccinated against the coronavirus, will result in strong retail sales on the back of the U.S. government’s stimulus package.
All these factors will “contribute and conspire towards optimism in the market and then towards that spike in U.S. Treasurys,” Bouvet said, expecting yields to reach a “minimum” of 2%.
The 10-year U.S. Treasury yield, which is considered an indicator of investor sentiment on the economy because it is a benchmark for debt such as mortgage rates, hit a 13-month high of 1.6% during this past week. The yield has since move back slightly but was trading at 1.56% on Wednesday morning.
It has shot up from 1% since the end of January, amid concerns about rising inflation. These concerns have been compounded by fears that the U.S. government’s $1.9 trillion fiscal relief package, which House Democrats are expected to pass on Wednesday, could stimulate the economy too quickly and cause a surge in prices.
Inflation at 2.9% in 2021
February’s consumer price index, which tracks inflation, is due out at 8:30 a.m. ET on Wednesday. Economists expect it to have risen 0.4% in February, or up 1.7% from a year ago.
Bouvet said he didn’t think this reading would be the “big one,” adding that ING expected bigger inflation readings only to occur by the end of the second quarter, “potentially peaking around 3.5% and above.”
While Bouvet said a lot of that increase in inflation would be temporary, he said it would be interesting to see how the U.S. Federal Reserve reacts.
“It’s all well and good to say now that they won’t touch rates for a while, that tapering is not on the table,” he said. “When inflation is actually at 3.5% and shows only modest sign of declining, it’s going to be a much harder position to defend,” Bouvet added.
ING expected average inflation to reach 2.9% this year and stay at that level next year.
Bouvet therefore argued that “as much as it is a flash in the pan that we’ll see in the second quarter, the decline will be very slow and will change the debate at the Fed.”
— CNBC’s Patti Domm contributed to this report.