As U.S. Bond Yields Rise, Are Inflation Worries Justified?

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On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Senior Client Investment Analyst Chris Kyle discussed the rise in U.S. Treasury yields, the latest COVID-19 vaccine developments and the outlook for another round of U.S. fiscal stimulus.

Treasury yields soar as markets digest economic recovery prospects

U.S. government bond yields continued their rapid ascent the week of Feb. 22, Ristuben said, with the yield on the 10-year Treasury note topping 1.50% on Feb. 25. “Over the past month, Treasury yields have risen by roughly 45 to 50 basis points, with an increase of 10 to 15 basis points in the past week alone,” he remarked.

The jump in yields has sparked inflation fears among some, but Ristuben stressed that overall, inflation is unlikely to be a problem this year. While rates are likely to increase in the short-term, it’s important to note that much of the year-over-year gains will probably be attributable to the very low numbers observed in the spring of 2020—when inflation plummeted amid the coronavirus-induced economic recession, he said.

“Because of this, inflation rates are likely to come in at higher levels than in 2020—but I don’t foresee inflation becoming an issue this year. Unemployment remains high and capacity utilization remains low, with quite a bit of slack in the global economy,” he explained.

The spike in Treasury yields, Ristuben said, is basically a recognition by the market that a full economic recovery appears increasingly likely, with significant above-trend growth possible on a global basis this year. “It’s really a continuation, to some degree, of the economic reopening trade that has played out in markets ever since Pfizer’s Nov. 9 announcement on the efficacy of its vaccine,” he stated, “and recently, the reopening trade has been on steroids.”

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