Vaccine Results Boost Long-term Rates
Kiplinger’s latest forecast on interest rates
The news of Pfizer’s positive coronavirus vaccine results will boost service businesses and the economy, if and when the vaccine helps get the pandemic under control. But better economic prospects will cause interest rates to rise. As a result, the 10-year Treasury note’s rate will likely rise above 1% before the end of the year. If the vaccines from Pfizer and others are effective in practice, the 10-year rate will likely rise at least another half of a percentage point in 2021. However, if Congress fails to pass another stimulus package, then rates will likely tick down temporarily.
Mortgage interest rates have likely hit their low point and will edge slightly upward from now on. Last week, the 30-year fixed rate hit its lowest point since the Freddie Mac rates survey began in 1971 — 2.78% (the 15-year rate was 2.32%). The rise in the 10-year Treasury rate means that the gap between it and mortgage rates is close to the historical norm.
The Federal Reserve at its most recent Federal Open Market Committee meeting recommitted itself to keeping short-term interest rates near zero for the foreseeable future, which likely means through 2024. The Fed is also continuing to purchase $80 billion of Treasury securities and $40 billion of mortgage-backed securities every month, adding to its balance sheet. The Fed is “all in” to do whatever it takes to support the economy. Its statement said that it will be willing to tolerate inflation levels above 2% for a time. That means that the Fed will not raise short-term rates even if inflation begins to pick up, but leaves unspecified when it would act to curb inflation.
Corporate high-yield bond rates have eased after the election, perhaps indicating greater business confidence. CCC-rated yields are at 10.8%, down from 11.7% at the end of October, and have closed the gap slightly with higher-rated bonds. AAA bonds yielded 1.62% and BBB bonds, 2.32%.
