Treasury yields have awoken from a long slumber and 10-year maturities have jumped above 1%, on hopes for better economic growth driven by vaccinations and additional fiscal stimulus. A just-published report examined a number of timely investment issues, including the outlook for Treasurys.
While near-run prospects are not threatening, because of increased infections and economic restrictions, ultimately Treasury yields should move higher in waves, i.e. to experience periods of rising yields followed by consolidation phases in a pattern of higher highs and higher lows. This profile largely prevailed when the 10-year Treasury yield rose by nearly 200 bps from mid-2016 to 2018. The two up-moves saw the 10-year Treasury yield lift by 120 bps and 100 bps from trough-to-peak, respectively. An even more dovish Fed this time will still not be able to prevent higher bond yields, although it argues for smaller rises this cycle.
Bottom line: we remain underweight bonds within a multi-asset portfolio, and underweight government bonds within a fixed-income portfolio.