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An outbreak of inflation will push 10-year authorities bond yields to over 2% within the coming months, Wells Fargogo predicts

Government bond yields could be about to break out.

Although yields fell temporarily following the Fed's interest rate decision this week, Wells Fargo Securities’s Michael Schumacher expects the benchmark interest rate on 10-year government bonds to rise to 2.20% by the end of the year.

"The 10-year return increases a little over the rest of the year," the company's head of macro strategy told CNBC's "Trading Nation" on Thursday. "Not a steady rise, to be sure. But we think there will be a pretty sharp fall for the bears in the next six [to] seven months."

Schumacher attributes the inflation comeback to his forecast – with a focus on the next 12 months.

"The core PCE that the Fed is keen to see for next year is over 3%. That's an amazing number. We haven't seen inflation like this in the US in a very long time," he said. "That really gets what people are focusing on in the market: how long will this rise in inflation last? Is it temporary? Is it temporary? I don't know. But it's worrying, that's pretty clear."

In his post-Fed research note, Schumacher said the Fed is still coming to terms with the rise in inflation. According to Schumacher, the greatest risk to the bond market and the economy is the possible reaction of the Fed to the strong economic comeback. If the Fed got scared, it would likely hike rates next year instead of waiting until at least 2023.

Schumacher's prospects for the bond market are so far on schedule.

For 2021, Schumacher predicted that the 10-year return would reach 1.15% to 1.35% by this year's half-time – with the caveat that it could reach as high as 1.50%. He made the forecast when the yield was below 1% and months before the Covid-19 vaccines were generally available.

On Thursday, the 10-year yield closed at 1.51%. It's up nearly 4% in the last week, but it's down 8% in the past three months.

He also doubts the dollar, which originally shot up on a more restrictive Fed, will continue to add to its gains.

“In the first quarter of this year, the US, and arguably also the UK, had a huge advantage over most of the western world in terms of Covid vaccinations. Many countries are catching up now, and that can be viewed as a proxy for "future economic activity," said Schumacher. "The dollar is losing some of those tailwinds."

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