Do not discard a 10-year Treasury Bill yield as high as 2.25% this year.
That is the message from Michael Schumacher, of Wells Fargo Securities, before Wednesday’s Federal Reserve interest rate decision.
“The fiscal stimulus is huge and the launch of the vaccine seems to be accelerating a bit – not just here in the United States,” the company’s head of macro strategy told CNBC’s “Trading Nation” on Tuesday. “Many things are happening to increase yields.”
Still, Schumacher said he doubts whether Fed Chairman Jerome Powell will show immediate concern.
“He is very optimistic about any increase in yields. We believe he will maintain that stance tomorrow,” he said. “Our opinion at Wells Fargo is that he really will not try to slow down.”
Instead, Schumacher said he hoped Powell would link rising earnings to a vote of confidence in the economic recovery and indicated that it was a recovery move from having low inflation for so long.
“The world has never seen a coordinated reopening like this, ever. Not even after World War II,” said Schumacher. He said he thinks Powell will signal a willingness to let inflation exceed its 2% target for “some time”.
In December, at Trading Nation, Schumacher predicted that Covid-19 vaccines would dramatically boost confidence and raise Treasury yields in 2021. So far this year, the 10-year benchmark yield has risen 77%. On Tuesday, it closed at 1.62%.
“Yields started this year – if you focus on the 10-year Treasury – just north of 90 basis points. It has risen about 70 basis points this year,” he noted. “So, 1.75% to 2%, I would say, can happen very quickly.”
Next year, said Schumacher, the yield may exceed 3%. That level could prompt the Fed to raise rates earlier than Wall Street predicts: 2022 instead of 2023, he said.
“The biggest risk … is that people underestimate how much the economy is recovering,” said Schumacher. “Maybe we are all a little too conservative.”
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