Strong jobs number may add fuel to Treasury yield rally: BofA’s Cabana

It appears a major shift is underway in the bond market.

BofA Global Research’s Mark Cabana sees an improving jobs market adding fuel to the Treasury yield rally and providing some relief to the Federal Reserve ahead of Tuesday’s policy meeting.

“We were really thinking that the economy would still really struggle to rebound in Q2, slowly begin to grow in Q3 and then more meaningfully be rebounding in Q4,” the firm’s head of US rates strategy told CNBC’s “Trading Nation” on Monday. “But the risk is it all happens sooner, and that would be a pleasant surprise.”

Cabana’s forecast calls for the benchmark 10-year Treasury Note yield to hit one percent by year end and 1.25% by the end of 2021’s first quarter. On Monday, the yield ended the day at 0.879%, up 33% in the last week.

“We still feel quite confident in that,” he said. “If anything, the risks are that the timing of that one percent 10-year could move forward much faster than we had thought.”

With optimism surrounding the economic recovery growing on Wall Street, Cabana believes the momentum will continue.

“We saw a pretty impressive move over the last week or so, The 10-year Treasury is almost 20 basis points higher having solidly broken out of the 50-day basis point range,” he noted.

This time last year, the 10-year yield was above 2%. But according to Cabana, it’s a level that’s still out of reach right now.

“It’s going to take quite some time before we get back there,” he said, adding a V-shaped recovery from the Covid-related shutdowns would push yields up no further than around 1.7% this year.

Cabana’s latest analysis comes ahead of Tuesday’s two-day meeting on interest rates.

He expects the Fed will stay on hold, but may signal some hope surrounding the current challenging economic environment.

“The Fed will no doubt sound a little bit relieved by the better than expected jobs report,” Cabana said. “But we still imagine that the Fed is going to sound relatively cautious on the outlook. The unemployment rate is still above 13%.”

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