The challenging path forward for yields

Nov 25, 2020 | Jay Zhang


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As the potential catalysts to a higher yield environment continue to disappear, we still see a gradually higher, albeit muted, path ahead over the long run, with potential for near-term volatility.

RBC DS-Forest

Sovereign yields, in the U.S. and globally, have largely remained stagnant since the March lows, struggling to move materially higher. But November was supposed to bring a number of catalysts, particularly in the U.S., that had the potential to change that.


Two of those major catalysts to higher yields: the prospects for fiscal expansion on presidential election results, and positive developments on the COVID-19 vaccine front are now seemingly priced out of the market, and mostly into the market, respectively. Not only has the benchmark U.S. 10-year Treasury yield failed to break above the key one percent level for what would be the first time since March, it has pulled back to some of the lowest levels seen in recent weeks.


The first chart shows that the path to higher yields is still expected to be a slow and arduous process. These forecasts, comprising approximately 50 analysts and compiled by Bloomberg in early November, at best incorporate some of the election and vaccine outcomes, but given how markets have reacted since, we suspect they would be little-changed at this point. The 10-year yield is first seen breaching one percent by the middle of next year, and only rising to around 1.5% by the end of 2022. Although COVID-19’s onset took just two months to drive the 10-year Treasury yield sharply below 1.5%, it could take more than two years to get back to that level. 30-year Treasury yields are also expected to trend higher on improving growth and inflation expectations.

 

Market pulse
3 U.S. small-cap equities outperform
3 Canada’s inflation rate edged higher in October
4 European fiscal package likely despite vetoes
4 Japan on “maximum alert”

 

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