US: Scope for 10-year Treasury yields to reach 2% later in the year – Charles Schwab

Treasury yields nosedived over the past few weeks, falling to the lowest level since February. Economists at Charles Schwab believe yields are now too low relative to the economic outlook and are likely to rebound later this year.

Real yields to move up due to a combination of easing inflation expectations and rising nominal yields

“We believe the market has gotten overextended once again. Ten-year Treasury yields at current levels appear too low relative to the economic outlook. The pace of economic growth and inflation are likely to ease in the second half of the year, but are starting from very high levels and will likely stay above the trends seen in the past decade.”

“The shortage of labor that has emerged from the pandemic will likely mean rising real wages over time. Consequently, demand for goods, services and labor should be healthy enough to support higher yields. Moreover, real yields – adjusted for inflation – are steeply negative and are unlikely to be sustained if the economy continues to make progress.”

“The biggest risk to higher yields would be caused by the resurgence of the COVID-19 crisis. The surging delta variant poses a risk to global economic growth if it results in governments curtailing activity to slow the spread. That is a risk we’ll continue to monitor.”

“We expect the Fed to take a gradual approach to reducing its easy-policy stance, but to still lean toward allowing for more inflation than in past cycles. That should result in somewhat higher bond yields and a renewed trend toward yield-curve steepening.”

“We look for 10-year Treasury yields to trade in a range of about 1.20% to 1.60% over the next few months, with the potential to move higher longer-term. We still see the potential for yields to reach 2% later in the year, but it would require another steep rise in yields, similar to the rise in the first quarter. The possibility of that suggests the bond market could be in for some volatile moves in the second half of the year.”