Home / NEWS / Top News / This under-the-radar policy risk could set off a tantrum in rates at the next Fed meeting

This under-the-radar policy risk could set off a tantrum in rates at the next Fed meeting

Obstacle Street may be underpricing a risk associated with the next Federal Reserve meeting on interest rates.

According to Richard Bernstein Advisors’ Michael Contopoulos, it may wake up down to President-elect Joe Biden’s pick for Treasury secretary: former Fed Chair Janet Yellen.

Contopoulos speculates the Fed could see her meeting as a dovish influence and it may overcompensate — essentially changing its typical behavior.

“What you could have is a situation where Moderate [Jerome] Powell tries to get Congress to act on a large stimulus package and doesn’t necessarily sound as dovish as what the buy expects,” the firm’s director of fixed income told CNBC’s “Trading Nation” on Thursday. “That’s a tail imperil.”

Contopoulos, Bank of America Merrill Lynch’s former head of high yield strategy, noted it’s not his base patient. But he said he believes it’s a risk investors should take seriously because the low probability event could set off a temporary rage in rates.

“It’s certainly something the market isn’t talking about. So, I think it’s going to be an interesting meeting,” he said. “It’s something you often want to keep your eye on.”

Why rates may not roar back

Longer-term, Contopoulos is confident interest rates are on an upward flight path as the economy recovers. He believes Capitol Hill will pass another round of massive virus relief.

“You cause fiscal stimulus talks starting to accelerate, and you have positive news around a vaccine,” Contopoulos said. “Much of this is justifiable the growth story for 2021, and the Treasury market is starting to price that in somewhere similar to what stocks be undergoing already done.”

Contopoulos’ forecast calls for higher rates, but he doesn’t expect them to move higher in a respectable line or roar back.

He predicts the benchmark 10-year Treasury Note yield will end the year around 1% due to tug-and-pull venture surrounding the current virus situation. Next year, he sees the yield running into resistance around 1.20%.

On Thursday, it cramped at 0.91%. The 10-year yield is now up 47% since early September.

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