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Tom Lee: The 10-year Treasury yield could be as high as 4% in 18 months

  • The yield on the 10-year Treasury could be as high as 4 percent in 18 months, strategist Tom Lee says.
  • That's in line with what nominal GDP looks like, the co-founder of Fundstrat Global Advisors says.

The yield on the benchmark 10-year Treasury could be as high as 4 percent in 18 months, strategist Tom Lee told CNBC on Tuesday.

That's in line with what nominal GDP looks like, the co-founder of Fundstrat Global Advisors told "Squawk Box."

"That's where the 10-year should be," he said.

The Commerce Department last month said nominal gross domestic product, which does not account for inflation, increased 4.1 percent for 2017. (Real GDP, often lower than the nominal number and closely followed as a market-mover by Wall Street, gained 2.3 percent for last year.)

The 10-year yield early Tuesday was trading around 2.85 percent, off recent four-year highs just under 3 percent. Bond yields move inversely to prices.

Investors need to realize that the era of falling interest rates is ending, Lee said.

"It's necessary to get off low interest rates," he argued. "The trajectory of interest rates isn't lower anymore. Investors have to price in how wage inflation affects overall inflation."

Stocks tanked and bond yields spiked in early February after a higher-than-expected wage number in January's jobs report sparked fears of inflation and rising rates. Equities on a closing basis eventually bottomed out Feb. 8, briefly plunging into 10 percent correction territory.

As of Monday's close, the Dow Jones industrial average and S&P 500 recovered about 85 percent of their losses from the sell-off earlier this month, while the Nasdaq erased its deficit. Stocks were fluctuating ahead of Tuesday's open.

The market's bounce back is a recovery from its overreaction to inflation fears, said Lee, whose year-end S&P 500 target of 3,025 represents a nearly 9 percent increase from where the index closed on Monday.

New Federal Reserve Chairman Jerome Powell is set to testify on the economy before the House Financial Services Committee Tuesday morning. In prepared remarks, he downplayed concerns over recent market volatility, saying the dramatic swings do not weigh heavily on his outlook for the economy. Powell maintained his expectation for further gradual increases in rates.

Powell speaks in the language that Wall Street understands, and should be constructive during his testimony, Lee predicts. "In an environment where you have to worry about inflation, you do want a Fed that understands how Wall Street thinks."

Lee, managing partner and head of research at Fundstrat, worked as J.P. Morgan's chief equity strategist from 2007 to 2014. He has 25 years of experience in equity research.

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