(Bloomberg) -- The rise in bond yields has further to go.
So says a Bank of America Merrill Lynch global research report released Wednesday. U.S. economist Michelle Meyer and her colleagues argue that the market hasn't fully taken into account how far the Federal Reserve intends to raise interest rates.
While investors seem to believe in the Fed's ability to more or less hike rates three times this year, they remain skeptical about increases thereafter, said the report.
“We think that the market is mispriced and will ultimately capitulate to the Fed, sending rates higher,” the economists wrote.
They pointed to three main drivers that will push yields up: rising inflation, continued economic growth and a higher equilibrium interest rate.
The Federal Open Market Committee on Wednesday left its target range for the federal funds rate unchanged at 1.25 percent to 1.5 percent. Policy makers see that rate rising to 3.1 percent by the end of 2020, according to the median projection of Fed officials released in December.
The yield on 10-year Treasuries reached 2.75 percent after the Fed's announcement and has gained more than 25 basis points since the beginning of the year.
To contact the reporter on this story: Shelly Hagan in Washington at shagan9@bloomberg.net.
To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods
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