How High Could U.S. Treasury Yields Rise This Year?

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On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the outlook for U.S. government bond yields, market reaction to U.S. President Joe Biden’s infrastructure plan, and the economic growth outlook for China.

U.S. interest rates may be nearing peak levels for 2021

Long-term interest rates, which have been rising in many developed countries since the start of the year, fluctuated a bit the week of March 29, Cousley noted. “Yields on government bonds in both the U.S. and Germany rose for the first few days of the week, before falling in the latter part, ending the week up slightly,” he remarked.

U.S. government bond yields, which have climbed sharply since January, are probably nearing their peaks for the year, Cousley said, noting that he expects the benchmark 10-year U.S. Treasury note to trade between 1.5% to 2.0% through the end of 2021. “Some volatility in Treasury yields appears likely as markets continued to digest the economic reopening—but as discussed in our just-released Q2 Global Market Outlook, we believe there is an upside cap to how high rates are likely to rise this year,” he stated. One of the main reasons for this, Cousley explained, is that the U.S. Federal Reserve (the Fed) is unlikely to raise short-term rates for at least two years, due to its new average inflation targeting approach.

He noted that in areas outside the U.S., such as in Europe and Japan, yield curves haven’t steepened as much, mainly due to more aggressive central bank policies that maintain some control over long-term rates. However, Cousley does expect European bond yields, in particular, to increase a bit as the economic recovery accelerates and the region’s vaccine rollout improves.

Key takeaways from Biden’s infrastructure plan

Turning back to the U.S., Cousley said that market reaction to the official unveiling of President Biden’s $2.3 trillion infrastructure plan was a bit interesting. “The benchmark S&P 500® Index actually topped 4,000 for the first time ever, one day after details of the package were announced,” he remarked.

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