Market Minute - March 10, 2021
by Scott Rosenquist, CFA
The bond market is starting to take center stage as the yield on the benchmark 10-year Treasury briefly hit 1.60% in late February before backing off to around 1.50%. The absolute level of interest rates is still low from a historical perspective, but the pace of the increase since the beginning of the year has startled the equity markets. The 10-year Treasury was yielding below one percent at the beginning of the year.
There appears to be a tug of war in the bond market that is catching investors’ attention. Higher interest rates are generally associated with a strengthening economy and increasing inflation expectations. Another vaccine was approved for use by the FDA and should help bolster the supply as production continues to ramp up. Congress is working on another stimulus bill that should help those in need and give another boost to the consumer. All these combined should lead to higher interest rates in the future.
On the other side of the coin are the recent statements from Federal Reserve officials that they have no intention of raising interest rates until the labor market is back to full employment. The current unemployment rate is 6.3% although Fed officials believe that number is understated and closer to 10%. The Federal Reserve continues to purchase $120 billion of bonds each month to keep rates low.
This dynamic between the bond market and the Federal Reserve has several market implications. The 10-year U.S. Treasury is considered a risk-free rate and many risk assets are priced off of it in both the bond and equity market. As Treasury yields increase, it makes riskier investments relatively less attractive. Interest rates are notoriously difficult to predict but the ongoing tug of war could keep markets volatile in the near term.
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