Updated: 03-01-2021

Ready for a slower rate of change?
Updated: 25-Feb-21  01:07PM ET
Analyst: Pat O'Hare

On February 4, when the 10-yr yield was at 1.14%, we published a column that suggested it might be as easy as 1-2-3 for the 10-yr yield to get back to its pre-pandemic perch if it closed above 1.18%.

Well, it closed above 1.18% on February 12, and today -- February 25 -- it kissed 1.50%.

In other words, it was an easy-breezy move this month to get back to levels last seen before the pandemic.

So, one knows where we were at the start of the month and where we are now as the month of February draws to close.

The question today is, what now?

The answer is that it probably won't be so easy-breezy to drive the 10-yr yield higher. That doesn't mean the 10-yr yield can't or won't go up; it just means that the rate of change is apt to slow.

The reason we think as much is twofold:

  1. It's technical. There wasn't any real overhead resistance between 1.18% and 1.50%, but there is now.
  2. Market participants will be increasingly mindful that the Fed could start to assert more yield curve control by focusing more of its asset purchases on securities with longer durations.

The Fed has wanted a steepening of the yield curve, driven by improved growth and higher inflation expectations. It has gotten it. The 10s2s spread is as wide as it has been since 2016.

What the Fed doesn't want is higher rates choking off the economic recovery effort, part of which includes fostering increased spending potential through rising stock and home values.

The higher long-term rates go, the greater the challenge will be to sustain elevated prices in the stock market and housing market as valuation/affordability pressures increase. The Fed knows this, which is why the market knows the Fed, which has acknowledged substantial further progress is still needed to meet its goals, has a vested interest in keeping long-term rates in check.

Accordingly, don't be surprised if the rate of change in long-term rates starts to slow as the Fed shifts to putting more money where its mouth is or at least signals that's what it is thinking of doing.

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