Overnight, 10Y Treasury yields jumped to 1.56% after Federal Reserve Chairman Powell showed little concern yet about this year’s surge in yields.
In a Wall Street Journal webinar, Powell only said the recent sharp rise in yields ‘was notable and caught my attention. I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.’ Powell did not signal the Fed was ready to take any action yet to counter the surge in yields, prompting Treasury rates and the USD to jump.
This year’s bond market sell-off is being driven by rising inflation expectations and US growth prospects. This week we increased our 12-month forecast for 10Y Treasury yields from 1.50% to 1.90%. 10Y yields began the year at 0.90%.
So far Fed officials do not see this year’s surge in Treasury yields putting the central bank’s longterm goals of securing full employment after the pandemic and stable 2% inflation at risk.
In the next few months, however, policymakers are unlikely to remain indifferent if 10Y Treasury yields keep surging towards 2.00% and sharply weaken risk assets.
Currently, Treasury yields are still low by historic standards. But Fed policymakers will not want to see 10Y yields keep rising by 30-40ps each month as already occurred in February.
Source: Bank of Singapore, Bloomberg
Tighter financial conditions would hurt equities, push inflation expectations back below the Fed’s 2% inflation target and increase real yields to the detriment of the recovery.
Notably, the Fed continues to be very dovish about the overall economic outlook. Powell again signalled officials were not ready to start tapering quantitative easing: ’we will be patient. We’re still a long way from our goals.’
Powell also sees rises in inflation this year as the economy re-opens as being only temporary ‘and certainly not staying up to the point where they would move inflation expectations materially above 2%.’ He therefore gave no indication the central bank will consider raising its fed funds interest rate from 0.00-0.25% if inflation exceeds its 2% target in 2021. Instead the Fed continues to forecast no interest rate rises until 2024 as it expects inflation to fall back again below its 2% goal in 2022 and 2023.
Thus, given the central bank’s very dovish economic outlook, we expect the Fed will become concerned if US Treasury yields were to keep surging higher over the next few months and cause further sharp sell-offs in risk assets.
Powell said: ‘financial conditions are highly accommodative and that’s appropriate given the ground the economy has to cover.’ But he also warned: ‘if conditions do change materially, the committee is prepared to use the tools that is has to foster the achievement of its goals.’
Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.
Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
