Strategist on the 10-year treasury yield: “I would actually view it favorably'

Brian Levitt, Invesco Global Market Strategist, joined Yahoo Finance Live to break down the May Consumer Price Index and his thoughts of the 10-year treasury yield.

Video transcript

SEANA SMITH: We want to continue this conversation, talk about how the market is looking at that inflation number that we got out this morning. We want to bring in Brian Levitt. He is Invesco's global market strategist. And Brian, it's good to have you back. Well, how is the market-- or why is the market not necessarily reacting the way I think we would have expected it to react if we got that higher-than-expected inflation number?

BRIAN LEVITT: So the market is going up. You would expect a better economic environment and higher inflation to be good for corporate equity. So I would say that is one. Now, I think that investors may have some concern that if inflation was too hot, that there would be fears of Fed tightening and, you know, a real significant tightening of financial conditions and that would weigh on equities.

So the reality is, you're seeing markets go up, but you are seeing some of that dynamic play out. You know, why-- if inflation is up, why do you see the 10-year rate down a bit? Why do you see tech stocks outperforming on a day like today? I would argue that it's a market that's saying, yeah, it is inflationary. It's not going to run out of hand-- it's not going to get out of hand.

You may see some policies-- some steps to normalize policy over time. As the Fed does that, you'd expect bond yields in a bit, and you'd expect the growth stocks that can outperform at a slower growth were all doing well. So I think, actually, the narrative of the market today makes appropriate sense, given the inflation report that we received.

ADAM SHAPIRO: Brian, despite that inflation report, getting back to what you just said regarding the yield on the 10-year, could investors be also telling us that they're worried not necessarily about inflation, but about something else? Because it seems as if people are, you know, protecting their gains and storing cash to their own detriment. They're not really going to get anything being in bonds.

BRIAN LEVITT: They're not. I think it's a-- you know, it's a natural move where if policy conditions are going to be tightened at some point in the future, then there's this instinct to start to move towards safer-haven assets. You've saw-- we saw that in 2013. We saw it in 2015. We saw it again in 2018. Any time the Fed tried to make a move, you saw rates rally. And this isn't even the Fed trying to make a move. It's simply a Consumer Price Index report that's somewhat elevated.

And you know, the reality is there's natural buyers for US Treasuries. You're not going to outperform-- you're very likely to outperform in US Treasuries. When you're at this earlier stages of an economic cycle, stocks tend to outperform bonds for a meaningful period of time.

But you know, there's natural buyers. The Fed's active in those markets. Foreign investors who are looking at very low yields in their host countries are natural buyers. And you know, 40%, 50% of the market is US savers that are still looking to get money somewhere when they're earning nothing at the bank.

So I wouldn't view this as overly ominous. I would view it as-- I would actually view it favorably. It's a bond market that's saying that things are not getting out of hand. We're not seeing the bond market tantrum. It's actually starting to price in what is a more modest growth environment on the other side of this economic recovery. A more modest growth environment should be very conducive for equities.

SEANA SMITH: So then, Brian, do you think that yields are going to hold steady? What are we, right below 1.5 again today? Do you think we're going to hold around this level, or will we head higher before the end of the year?

BRIAN LEVITT: Yeah, I would think that you would see rates move somewhat higher as the year progresses, and that's not counter to what I was saying earlier. This is a reaction to, you know, expectations that, at some point, the Fed's going to raise rates. But I think what we'll find as the year progresses is that growth is strong. There is some pricing pressure, but the Fed's going to let it run. I think the Fed will use language to suggest that it'll let it run.

And then cyclically, rates should move higher from here. That's not to say that, you know, rates are going to 2.5% or 3%. We're still going to be in a structurally low interest rate environment probably for a lot of the rest of our careers, if not the rest of our lives. But cyclically, yeah, I don't see why rates shouldn't move higher in an improving growth backdrop in which the Fed is telling us that they're not going to be raising short rates for a while.

ADAM SHAPIRO: And then there's also the issue of taxation, and some investors may be making decisions today assuming there's going to be tax increases down the road from the Biden administration. But you point out, OK, when there are corporate tax increases-- and I think you took it back to, what, 1957-- it really hasn't impacted drastically the S&P 500 when we had a much higher corporate tax rate?

BRIAN LEVITT: Yeah, that's correct. In fact, if you look at all the years that we've seen taxes go up in the post-World War II period, there was really only one instance-- I think it was 1969-- in which stocks were negative. And we saw rates go up in the Reagan administration in '86. We saw rates go up under Obama in 2013. And those were just fine years for the equity markets.

I think it's also important for investors to realize, and if they look at the betting odds online right now, is that the probability of the corporate tax rate staying at 21% is now above 50%. Now, of course, that's not what President Biden had run on and what he's-- that's not what he's proposed.

But the reality is, it's a challenge within the own party. And you know, there's a very thin majority in the Senate. It's-- you'd have to do it through a reconciliation process in which you would need all 50 Democrat senators. And as of now, it doesn't seem like he has 50 Democrat senators to raise the corporate tax.

So I would say to investors, one, it's not a foregone conclusion. And two, even if it were to happen, the idea would be to bring it somewhere between where we are now and where we were at the end of the Obama administration, so call it 25% or 28%. And that's not a level, in my opinion, that would be very disruptive to the equity markets. In fact, as we all know, many S&P 500 companies do not pay anywhere near the-- that level of tax rate.

SEANA SMITH: Brian Levitt, always great to speak with you, Invesco's global market strategist. We'll talk with you again soon.