Effective vaccines, historic fiscal stimulus, Democratic Party control of the legislature, even more stimulus, reopening economies, 6% U.S. real GDP (gross domestic product) growth, 25% U.S. EPS (earnings per share) growth, and maybe even an infrastructure plan sprinkled on top. On the surface that sounds like the perfect recipe for a bond market massacre. But levels matter A LOT for interest rates (I’ll explain). And U.S. Federal Reserve (the Fed) Chairman Jay Powell still has a very heavy hand to play in Treasury markets before a complete recovery is achieved.

The Fed will keep overnight interest rates at zero this year. That’s a slam dunk—or at least the closest thing to a slam dunk that my compliance department will allow me to commit to paper here. Millions of Americans remain out of work, inflation is below target and the Fed wants to engineer an inflation overshoot before liftoff. Our best guess is it will be early 2024 before all of these boxes for liftoff are checked.

Longer-term interest rates are, well, more interesting. That is because their pricing hinges on not only what the Fed is expected to do this year, but several years into the future as well. Our central tendency for the 10-year Treasury yield is between 1.1% and 1.6% at the end of 2021. That would only represent a modest lift in yields from current levels. Critical to this outcome is when inflationary pressures are likely to threaten on a sustained basis and, relatedly, how long the Fed intervenes in financial markets with their $120 billion per month of Treasury and mortgage-backed securities (MBS) purchases (quantitative easing).