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Strategist on proposed COVID-19 relief bill: ‘A $908B stimulus deal probably isn't enough’

Congress is set to vote on a $900 billion COVID-19 relief bill. Kathy Jones, Charles Schwab & Co., Inc. Chief Fixed Income Strategist joins Yahoo Finance Live to weigh in on the latest stimulus talks and break down why the Fed’s forward guidance could lead to higher market volatility in 2021.

Video Transcript

- As we've been tracking for weeks now, it does appear that Congress will be able to pass a new stimulus deal. This coming after months of failed negotiations. Looks like $908 billion will be the order of the day. Joining us now to discuss some elements to this deal that I think investors need to pay close attention to is Kathy Jones.

She's the Chief Fixed Income Strategist over at Charles Schwab. Kathy, thanks so much for joining the program today. Let's just begin by talking about how important this bill, as we know of it today, you know $300 a week in additional unemployment for the next couple of months, $600 stimulus checks, how much that does in your view to help the economy through the first part of next year.

KATHY JONES: Well, I think it's a good addition to what's needed. But it only sort of makes up for the lapse in some of these programs that we've had over the last month or so. So it's a positive, certainly. And I shouldn't-- nobody should sneeze at $908 billion going into the economy.

But nonetheless, it isn't probably enough, given that we still have the spread of the virus, we still have a number of significant needs out there in terms of hunger, and the need for income replacement for workers who simply can't get reemployed right now because the industry is shut down. It's good news. I don't know that it's enough news, at this stage of the game.

- Kathy, as part of this bill the Fed looks to potentially have its hands tied on how it can respond to future crises. How do you expect that to ripple through markets. And do you expect a ripple through markets.

- Well there are big question marks around the language in it. I think we're still waiting to see how it gets interpreted. At some point there'll probably be legal questions around it. But it was a last minute change that was put in that basically said the programs that the Fed has been using to special facilities, to support the economy and the markets need to sunset.

And then only in the future if they wanted to use similar programs or those programs, they might have to go to Congress for permission. Now that's being interpreted differently between the Republicans and the Democrats. Which is why I think there'll be a legal challenge to it.

But I think what is worrisome is the Fed was able to react very, very fast in March when things started to fall apart and rolled out these programs, got liquidity and money into the markets very, very quickly. And also boosted confidence really quickly, because they did roll out those programs.

If we now have to see the Fed go to Congress to approve that before they could take those sorts of actions again, you know we may be looking at-- look at how long it took to approve this bill. I mean, we don't want to get stuck in an emergency in a situation where no one can act because they're bickering over some clause in it.

So it's a little bit worrisome and that may dribble into the markets if we were to hit another big speed bump. If the Fed's hands are seen as tied in terms of reacting. But again, there's going to be different interpretations and I imagine some legal challenges along the way.

JULIE HYMAN: Kathy, it's Julie here. Given everything that you're saying, it seems like that that Georgia runoff election for control of the Senate is more important than ever when it comes to the next, if there is going to be another stimulus package, if it comes to another authority being given to the Fed to do this the next time around.

The conventional wisdom seems to be that if the Democrats do take control of the Senate, that that will be negative for equities. That the Dems will be seen perhaps as having too much power. How are you reading it and what effect would it have on the bond market?

KATHY JONES: Yeah, I know. With regards to equities, I think we're somewhat removed from the politics. I mean, I think you could see it either way in Georgia, right. You can either say, well Democrats might raise taxes and that would be negative for corporations and the stock market.

On the other hand, they might be more inclined to spend money in the economy, infrastructure, more fiscal stimulus. So that might be good for the economy and that might be good for stocks. So I think you could look at it either way.

For the bond market, I would say if the Democrats take control of the Senate, I would think that you'd see yields move higher. It would be the expectation that there'd be more fiscal stimulus and that probably would raise rates simply because it would be seen that the economy might recover a bit faster.

- And Kathy, then finally. Let's back out the politics if that is even possible in this kind of environment. But just think about the shape of the yield curve today and some of the dynamics that really helped markets last year.

What do you see in markets next year. Where do you see the 10 year headed, the 30 year, the rates that really can impact things like the housing market. How aggressive corporates are with M&A and so forth. Do you see a material rise sort of either way, or might we have a flatter year in fixed income.

KATHY JONES: Yeah, we're actually looking for yields to move higher at the long end. We've got a range for the 10 year treasury about 1% to 1.6% at the upper end. And that's a bit above consensus, I believe. And the reason is that we do see the recovery taking hold, assuming the vaccine rollout continues at a pretty rapid pace. We do see pent up demand.

And frankly, we have a Fed that's really biased to try to get higher inflation. And those inflation expectations have been rising. So we think that that will filter into the nominal yields at the long end. Now having said that, look 1 and 1/2 is not a high, particularly high treasury yield, right. Now we've been conditioned to have yields below 1% for most of this year. But 1 and 1/2 should not kill the housing market, it's gotten a huge boost from low rates. But I think it still could survive another 50 basis points or so in terms of mortgage rates. If the underlying demand is there and if employment growth starts to pick up as we expect as the vaccine gets rolled out. So it's an optimistic view on the economy going forward. And not necessarily a view that we're going to have a big inflation move or anything else. Simply that we've got the components here to see yields move back to where they were last March when this whole thing began.

- All right. Kathy Jones with Charles Schwab. Kathy always great to get your thoughts, have a great holiday and a happy New year.

KATHY JONES: Thank you, you too.