Since the start of 2021, U.S. 10-year Treasury yields have climbed 0.75ppt to 1.63%. Investors appear to have priced in higher interest rates and inflation on the back of strong economic-growth expectations. Still, while yields have surged, they remain well below the Fed’s long-run rate of 2.5%. This suggests room for higher adjustments. If the 10-year yields approach 2%, we may expect some market volatility. The previous time the 30-year yield crosses 2% in February, the S&P500 retraces 4.2%.
Progress will be outcome-based, depending on how the labour market and inflation play out, before the Fed decides on further actions. Therefore, we may not see any change in stance in the near term, considering that unemployment remained high at 6.2% in February.
Powell also mentioned that advance notice on tapering will be given as much as possible. We believe a key indicator to monitor is any slowdown in its asset purchases. The Fed’s latest balance sheet continues to show an increase in assets.