US Treasury yields have surged recently, likely due to economic optimism and rising inflation expectations. In past economic cycles, the slop of the yield curve (the difference between the 10-year US Treasury yield and 2-year US Treasury yield) has steepened following economic recessions. Looking at historical data, the yield curve typically rises to the 2.50% level - there are cases where it has spiked higher but it has not maintained those levels for long periods of time.
If we assume that the yield curve will rise to 2.50%, then the 10-year Treasury which reach a yield of 2.64% based on the current 2-year Treasury yield of 0.14%. However, this is not a textbook economy and we do not expect rates to rise to that level. The high likelihood of fiscal stimulus accompanied by vaccine-driven growth improvements would point to rates moving higher. But central banks are likely to continue accommodative policy well past 2021, which should put a ceiling on how high rates will go. The Fed has stated it does not currently plan on raising rates until 2023 and plans to buy almost $1 trillion of bonds in 2021.
For investors, it will be important to continually monitor the driver behind the rise in rates. If higher yields are the result of expected strong economic growth based on fiscal stimulus and progress on COVID-19, the impact on risk assets such as equities and corporate credit will likely be limited. However, if yields move higher because of less accommodative monetary policy, the outlook for risk assets could be more subdued.
If you have questions on how the interest rate environment could impact your portfolios, contact an advisor today.