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Will yield surge get out of control? This is Fed's next move - Danielle DiMartino Booth

Kitco News

(Kitco News) - The U.S. 10-year Treasury yield briefly surged above 1.5% on Thursday. Until the Federal Reserve declares an intervention to bring down the long-end of the curve, equity markets could see continued "nervousness" said Danielle DiMartino Booth, CEO of Quill Intelligence.

Yields rose on the back of higher inflation expectations, and importantly, while 1.5% is still not very high on an absolute level, the pace at which yields have risen has alarmed investors, DiMartino said.

“Much more importantly is the rapidity with which we’ve seen the increase. In August, we had a 10-year yield of a third of what you just said, 1.5%. So, it’s a very rapid move an you have to consider that even though rates are very low at absolute levels, the rate of change, the delta, that matters as well,” she said.

Equities don’t like higher yields, as rising rates lower valuations, and markets are already seeing signs of a weakening stock market and over-leveraged economy, she added.

“What we’re seeing in markets and some of the jittery reactions we’re seeing in stocks not liking the rise in rates is also an acknowledgement of the fact that we have more leverage in the system than we’ve ever had before, so there are major refinancing needs with commercial real estate in 2021. The same goes for the corporate bond market,” she said.

The Federal Reserve is likely to intervene by bringing down the long end of the yield curve, DiMartino noted.

“It’s a lot of the same mechanisms of quantitative easing, [the Fed] is just going to buy up enough debt until they get the yield where they want, they’re going to cap that yield at a certain level,” she said, noting that higher yields could potentially hurt full employment as corporations reduce costs by lowering head count.

Full employment is one of the mandates of the Federal Reserve, along with controlling inflation.

On inflation, while an increase in the money supply may not have had a direct impact on inflation over the last few decades, what the Federal Reserve needs to consider is money velocity and the damages to the supply chain in relation to inflation, she said.

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