The US 10-year rate of return could rise well above 2% in the next three months

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The US Treasury Department’s 10-year rate of return is likely to hit 2% by the end of the year, but could be “well above” in the second quarter, according to Antoine Bouvet, ING’s senior rate strategist.

Bouvet told Street Signs Europe on Wednesday that the planned reopening of the economy in the second quarter, hoping the vast majority of the US population will be vaccinated against the coronavirus, will result in strong retail sales as part of the US government’s stimulus package .

All of these factors will “add to the optimism in the market and then to this surge in US Treasuries and conspire to conspire,” said Bouvet, expecting yields to hit a “minimum” of 2%.

The US Treasury Department’s 10-year yield, considered an indicator of investor sentiment about the economy as it is a measure of debt like mortgage rates, hit a 13-month high of 1.6 last week %. The yield has declined slightly since then but was trading at 1.56% on Wednesday morning.

It’s up 1% since late January amid concerns about rising inflation. Those concerns were compounded by fears that the US government’s $ 1.9 trillion bailout package, which House Democrats are expected to pass on Wednesday, could stimulate the economy too quickly and cause prices to surge.

Inflation at 2.9% in 2021?

February’s consumer price index, which tracks inflation and was released Wednesday morning, was in line with expectations.

The Labor Department said its consumer price index rose 0.4% last month after rising 0.3% in January. In the twelve months to February, the CPI rose 1.7%, the largest increase since February 2020 after rising 1.4% in January.

Before publishing the data, Bouvet said he didn’t think that figure would be the “big one,” adding that ING did not expect larger inflation figures to appear until the end of the second quarter, “which may peak at 3.5% and above” .

While Bouvet said much of this spike in inflation would be temporary, he said it would be interesting to see how the Federal Reserve reacts.

“It’s all well and good to say that they won’t touch the rates for a while and that the taper isn’t on the table,” he said. “If inflation is indeed at 3.5% and showing only modest signs of decline, it will be much more difficult to defend,” added Bouvet.

ING expects the average inflation rate to reach 2.9% this year and stay at that level next year.

Bouvet therefore argued that “as much as there is a flash in the pan that we will see in the second quarter, the decline will be very slow and will change the debate at the Fed.”

– CNBC’s Patti Domm and Maggie Fitzgerald contributed to this report.