Morgan Stanley said the 10-year Treasury yield increase is reasonable and a reflection of growing confidence in the US economic outlook, according to Jim Caron, the investment bank’s global fixed income portfolio manager.
The 10-year Treasury yield jumped above 1.7% on Thursday, its highest level in more than a year. It came even though the Federal Reserve assured investors that it had no plans to raise interest rates anytime soon, nor to facilitate its bond-buying program.
Yield on 30-year Treasury bills rose 3 basis points to 2.472%. Yields move inversely to prices.
The recent increase in bond yields does not indicate a tightening of financial conditions, according to Caron.
“The way I see it is that as we are sitting around 1.75%, 1.7% on the 10-year note, I think this is a reasonable area where we can expect some consolidation,” he said on Friday , referring to how the yield is likely to remain within a range, either continuing much higher or reversing much.
“Because this is the level that the market expected we would reach, in a more dovish announcement than expected from the Fed. And that is what we achieved,” he told CNBC during “Squawk Box Asia”.
‘Extremely optimistic’ in US growth
After the Fed’s two-day policy meeting concluded on Wednesday, the U.S. central bank said it sees stronger economic growth than previously estimated, forecasting that gross domestic product would increase to 6.5% in 2021. This is greater than the projected 4.2% increase in GDP that was forecast in December.
The Fed also expects core inflation to reach 2.2% this year, but has a long-term expectation of around 2%.
Confidence is growing while states are reopening, people are being vaccinated and infection rates are decreasing.
Jim Caron
global fixed income portfolio manager, Morgan Stanley
Michael Spencer, chief economist and head of Asia Pacific research at Deutsche Bank, shared a similar view, saying it is “entirely natural that yields on purchased securities are going up”.
“Everyone is very optimistic about the growth in the United States. We expect the economy to grow 7.5% over the course of this year,” he told CNBC’s “Squawk Box Asia”.
“I don’t think what we saw is messy. I think we have to wait until the end of the year, yields on 10-year bonds will be two and a quarter (percent), or more.”
The increase in Treasury yields is a reflection of strong growth in the U.S. economy after the recent $ 1.9 trillion coronavirus relief package signed by the Biden government last month, said Caron. He added that this is likely to boost confidence as the country recovers from the coronavirus pandemic.
“Trust is coming in as states are reopening, people are being vaccinated and infection rates are falling. Certainly, all that extra money that comes from the aid plan and payroll protection programs is going to be useful This will really help… confidence and consumption – consumption being 70% of GDP “, said Caron.
Caron also played down concerns that the tax relief package could lead to to higher inflation.
“I don’t know how inflationary this is. There has been a lot of money printing. However, what we have to see is speed, which means that economic activity really starts to recover as it really creates inflation. And we are not seeing that yet “, he observed.