June 27, 2014
Since Janet Yellen assumed the reins of the Federal Reserve in February 2014, investors have tried to anticipate the new Chair’s action with regard to quantitative easing (QE). Because the new members of the 2014 Federal Open Market Committee generally have favored less easing, the timing of the first policy rate increase is expected to accelerate to the first half of 2015, albeit at a slower pace than in past tightening cycles.
What might that mean for Treasury yields? “As QE is reduced, the range of possible yield becomes larger, which may lead to increased interest rate volatility,” says Jennifer Vail, Head of Fixed Income Research for U.S. Bank Wealth Management.
For example, potential yield outcomes for the 10-year Treasury with QE might range from 1.5percent to 3.5 percent, according to 2014 datafrom financial research company FactSet; without QE, yields might range from 0 percent to 7 percent.
A Gradual Rise in Interest Rates
Over the next few months, Vail believes the yield curve will remain steep and interest rates will continue to rise gradually — although the scope for interest rates to rise significantly appears limited.