Yields could rise with debt near “dangerous” levels

The S&P 500 dipped 0.1 percent last week.

A Federal Reserve monetary policy meeting this week is unlikely to move the market significantly as it is widely expected that the central bank will not signal a change to its policy stance.

“The economic outlook is fairly good, as long the Fed keeps its foot on the pedal,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The market has finally accepted that they will.”

However, Michael Schumacher, Wells Fargo Securities’ head of macro strategy, thinks that the Fed’s high level of comfort with rising inflation, the massive amount of fiscal and monetary stimulus in the pipeline and the economic data’s strength, could drive Treasury yields back up.

“It’s a recipe for yields to go up and perhaps pretty significantly,” he told CNBC on Friday.

Apart from potentially impacting markets, a rise in bond yields could spell trouble for some countries that are already knee-deep in debt.

A paper by Marcos Chamon and Jonathan D Ostry at the International Monetary Fund warned that debt in some countries “is getting closer to levels that were previously considered dangerous”.

“For some countries, the remaining fiscal space would not allow a response of a size comparable to what was deployed following the Global Financial Crisis or COVID-19—potentially constraining action in the event of another major shock,” they wrote.