This under-the-radar policy risk could set off a tantrum in rates at the next Fed meeting


Wall Street may be underpricing a risk associated with the next Federal Reserve meeting on interest rates.

According to Richard Bernstein Advisors’ Michael Contopoulos, it may come down to President-elect Joe Biden’s pick for Treasury secretary: former Fed Chair Janet Yellen.

Contopoulos speculates the Fed could see her appointment as a dovish influence and it may overcompensate — essentially changing its typical behavior.

“What you could have is a situation where Chair [Jerome] Powell tries to get Congress to act on a large stimulus package and doesn’t necessarily sound as dovish as what the market expects,” the firm’s director of fixed income told CNBC’s “Trading Nation” on Thursday. “That’s a tail risk.”

Contopoulos, Bank of America Merrill Lynch’s former head of high yield strategy, noted it’s not his base case. But he said he believes it’s a risk investors should take seriously because the low probability event could set off a temporary tantrum in rates.

“It’s certainly something the market isn’t talking about. So, I think it’s going to be an interesting meeting,” he said. “It’s something you always want to keep your eye on.”

Why rates may not roar back

Longer-term, Contopoulos is confident interest rates are on an upward trajectory as the economy recovers. He believes Capitol Hill will pass another round of massive virus relief.

“You have fiscal stimulus talks starting to accelerate, and you have positive news around a vaccine,” Contopoulos said. “Much of this is just the growth story for 2021, and the Treasury market is starting to price that in somewhere similar to what stocks have already done.”

Contopoulos’ forecast calls for higher rates, but he doesn’t expect them to move higher in a straight line or roar back.

He predicts the benchmark 10-year Treasury Note yield will end the year around 1% due to tug-and-pull activity surrounding the current virus situation. Next year, he sees the yield running into resistance around 1.20%.

On Thursday, it closed at 0.91%. The 10-year yield is now up 47% since early September.


Products You May Like

Articles You May Like

Opponents to $2,000 stimulus checks say they are not targeted. How that could be fixed
How being unemployed in 2020 could lead to a surprise tax bill
Crocs shares soar on raised sales outlook through 2021
Top Wall Street analysts back these stocks as earnings season kicks off
So long, Peloton: Joe Biden may need new exercise equipment when he moves to White House

Leave a Reply

Your email address will not be published. Required fields are marked *