Inflation and yield U. S.

U. S. 10-yr yield kept rising

The yield on the benchmark 10-yr U. S. Treasury note hit another high in the middle of today to 1.18%.

Over the week, two of Fed members talked about inflation risk and possible rate rises earlier than 2023 that the FOMC has committed. The concern was related to potential dramatic demand increase when COVID under control.

Inflation over the past decade has been consistently below the target that was set by the Fed. I think it is reasonable to allow inflation above target for sometime to make up the inflation that has missed in the past. The FOMC has adjusted its inflation target to be average basis rather than an instant number.

I don’t think inflation is the only reason for the rise of yield. I think investors are rebalancing their risk portfolios in anticipation to better returns from value stocks in the Dow components and major S&P companies. They sell bond (as a result, yield rises) and move money to stock market.

The U. S. 10-yr yield could reach 2% by the end of this year. High yield is good for stocks of the banks and insurance companies. Though the major U. S. banks such as BAC and JPM their stocks have recovered to their pre-COVID levels, I expect them to keep their uptrend. In a week also we will hear their earning reports and I am hoping they will bring good news on higher profits, less contingency for loan losses, and improved buyback programs. I also expect the banks will get a green light from the Fed to increase dividend payments and less restriction on share buybacks after the Fed completes the next round of bank stress test.

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