Ed Yardeni, president and chief investment strategist at Yardeni Research, says the Federal Reserve will be very concerned and may act if the bond yield moves above 1%.

As a result, he is advising clients to stay in U.S. equities.

“There is a possibility that if the stimulus package finally gets through, the perception will be that the economy is doing reasonably well and now it’s going to be on fire,” Yardeni told Bloomberg TV.

“If the bond yield starts moving above 1%, then I think the Fed is going to be very concerned because housing has gotten a tremendous lift here from low mortgage rates,” said Yardeni, also a Newsmax Finance Insider.

Benchmark U.S. Treasury yields retraced from four-month highs reached earlier in the day on Friday as investors waited to learn whether U.S. lawmakers will strike a deal on new fiscal stimulus.

“The market’s playing out inflation expectations here, based on expectations that there’s more stimulus and, if Biden gets in, that they will do even more spending than we’ve done under the current administration,” said Lou Brien, a market strategist at DRW Trading in Chicago.

Benchmark 10-year Treasury yields rose as high as 0.872%, the highest since June 9, before falling back to 0.841%. The yields are edging above their 200-day daily moving average, which they have held under since December 2018, Reuters said.

If the election result is delayed it could dampen risk appetite and increase demand for U.S. bonds, said Zachary Griffiths, an interest rate strategist at Wells Fargo in Charlotte. "Over the next couple of weeks we think the risks are to the downside, particularly the long term yields given the big back up that we’ve seen for the past couple of weeks," he said.

Analysts also caution that ongoing economic weakness and global demand for yield could limit any large increase in bond yields.

The Fed is also expected to shift more of its bond purchases to longer-dated debt if it sees yields rising faster than economic growth warrants. Investors have been positioning for rate increases via the eurodollar options and swaptions markets, and any bout of profit taking in these trades could also pull yields back lower.

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