UBS Global Wealth Management's Leslie Falconio joined Yahoo Finance Live to break down what the ten-year note moving higher would mean for the common investor.
ADAM SHAPIRO: And in a recent note, you talked about the 10-year yield moving sharply higher as inflation expectations decline. Help us understand what that means in the real world. And I mean the real world on every street corner other than Wall Street.
LESLIE FALCONIO: Well, I mean, what people are looking at are, in a sense, real yields in terms of what your borrowing costs are, what corporations can borrow at. And what we're seeing now is just this spike in nominal yields or US Treasury yields, in a good way, right, as financial conditions remain loose and the economy continues to grow.
But we also have to look at what's happening with inflation expectations or, say, the consumer's purchasing power. So as we've had these sort of inflation expectations rise, it is impacting what we call real yields. And one of the things that we look at in particular and one of the things that we believe the Fed looks at are things like the 30-year mortgage rate.
You know, having the consumer and not restricting the consumer is key. And when we look at what's happening to the 30-year mortgage rate that has gone up the highest in the past three months, that's something that we believe that not only Wall Street looks at, but obviously the consumer looks at.
So when we enter this morning and we hit these rising 10-year yields close to 1.43, it does sort of-- it is rather eye-opening, just not only the level but how quickly we got there.
SEANA SMITH: Well, and Leslie, going off that, you mentioned how quickly we got to the levels that we're currently seeing today. How worried, then, are you about a potential rate shock? Or do you think some of the risk that we've been talking about over the last few weeks is slightly overblown?
LESLIE FALCONIO: You know, I think it's a little overdone. Our opinion is the Fed does not taper this year. And we think that the 120 billion that they're buying a month, the 80 billion in treasuries, and the 40 billion in mortgage-backed securities stays as is. And the reason that is is because they don't want to see the 30-year-- or the 10-year Treasury go too high. They don't want to see the mortgage rate go too high too quickly.
So we do think that the move that we've seen in the past eight weeks is much greater than what we anticipated. But we don't think this is going to be the sort of 2013-type scenario. Because again, as Powell has reiterated numerous times, yields are rising on the back of stronger growth-- or the expectation of stronger growth on positive news, on the expectation that consumer demand increases during the second half.
So financial conditions, what we refer to, remain relatively loose. So our expectation is not to have this large rise in interest rates much further from here, but you really need to see, you know, not just look at the projections now, you need to look at the data. And the data won't really be clear until the second half.
ADAM SHAPIRO: But the yields that we're seeing are still minuscule compared to what most of us grew up with or knew as adults. So what's that magic number at which point the Fed goes in to say, no, we don't want it going higher? Or people in equities say, you know what? I need to go into fixed income. We're nowhere near that number.
LESLIE FALCONIO: We aren't. And you're absolutely right. And it's really difficult to say a magic number. People have thrown around, if you want to look at things like the equity premium, maybe it's a 2% nominal 10-year Treasury yield. But it really, again, depends on financial conditions.
If the credit markets are doing well, if the dollar doesn't appreciate quickly, if people still have access to capital and financial conditions remain loose, then it's a healthy rise in interest rates. If we go to the point where interest rates are rising and the equity market is doing poorly, we see this widening in credit spreads, that's when the Fed might take a step back and say, OK, this could be a bit concerning. And maybe they do something such as a WAM extension or something to really mitigate that rise in rates.