Brad Tank, Chief Investment Officer—Fixed Income

January 18, 2021

It is far too early for taper talk, in our view, but the bias of risk is still toward higher rates to come.

The U.S. 10-year Treasury yield has doubled since it began its march upward last August, and now stands at around 1.10%. Almost 20 basis points of that charge has come since the start of this year. The arrival of coronavirus vaccines had already fueled optimism over economic reopening, the confirmation that the Democrats will exert narrow control over both Houses of Congress added fiscal-stimulus accelerant to the fire.

We still like the look of credit, and we still see more downside than upside risk in duration.We do think rates are likely to go higher this year, but we anticipate a 10-year U.S. Treasury yield of around 1.25% in three months’ time, 1.35% in six months and only 1.50% by year-end.

Today’s level of 1.10% is still lower than our estimate of fair value coming into the fourth quarter of 2020—which is to say that we still haven’t seen a true normalization of rates after last year’s rush to safety. In fact, the adjustment has lagged the rise in inflation expectations: U.S. real rates have declined since November, when the coronavirus vaccines arrived on the scene. The picture is still more becalmed in the Eurozone, where core government yields have barely moved over the past three months.

Markets had priced in much of the Biden election campaign’s economic platform before he unveiled his $1.9 trillion formal plan last Thursday. The effect of that was not to bring its pricing for the end of zero-interest-rate policy forward to 2021, or even 2022, but to bring it forward from 2024 to 2023. Expectations that a narrow majority will likely delay or prevent some proposals from.