BlackRock Investment Institute

Macro insights

Keeping rising bond yields in context

The recent surge in U.S. bond yields has brought the outlook for monetary policy into focus. Federal Reserve officials have insisted on “patience” with policy, even as financial markets are eyeing a robust restart – one that may be taking place sooner in the U.S. with its vaccination rollout. The yield rises have sometimes sparked pullbacks in stocks.

Risk perceptions

The chart shows how the rise in term premium has matched the rise in nominal 10-year U.S. Treasury yields.

Past performance is not a reliable indicator of current or future results. Sources: BlackRock Investment Institute and Federal Reserve Bank of New York, with data from Haver Analytics, March 2021. Notes: This chart shows our estimate of the term premium in the U.S. 10-year Treasury note using a New York Fed model of the term structure, or the relationship between short- and long-term interest rates.

Is this a replay of the 2013 “taper tantrum,” when former Fed Chair Ben Bernanke first floated the idea of trimming the central bank’s bond purchases? We don’t think so – at least for now. This looks more like a “tantrum” in the term premium – the premium investors typically demand for the risk of holding long-term bonds – rather than a sharp reset of market expectations for the Fed raising policy rates. Our new nominal theme is based on the view that central banks will be less responsive to higher growth and inflation relative to the past. The upshot? Risk-free short-term rates, key to asset valuations, will likely stay lower for longer.

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