Fed to keep short rates low, but will bond yields play along?
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Federal Reserve Chairman Ben S. Bernanke‘s renewed pledge to keep short-term interest rates near zero for an ‘extended period’ is having the desired effect in the Treasury bond market today: Yields are pulling back after last week’s sharp move up.
The two-year T-note yield has slid to 0.92% from 0.97% on Monday. The 10-year T-note, a benchmark for mortgage rates, has dropped to 3.48% from 3.58%, though it’s still above its recent low of 3.31% on July 10 -- just before the stock market’s latest surge.
Yet some of Wall Street’s big players are warning clients today that even with the Fed’s benchmark short-term rate near zero indefinitely, longer-term interest rates could move higher as investors look for an economic recovery on the horizon -- and as the Treasury’s voracious borrowing continues, filling the market with new debt.
Bank of America Merrill Lynch economists, who earlier this month raised their estimate of U.S. real economic growth in 2010 to 2.6% from 1.8%, have given up on the idea of Treasury bond yields continuing to fall.
They now expect the two-year T-note to be at 1% at the end of this year and 1.5% by the end of 2010, ‘As investors begin to anticipate the beginning of a new [Fed] tightening cycle in 2011.’
BofA Merrill’s forecast for the 10-year T-note yield: 4.10% by the end of this year (a jump of about 0.60 point from current levels), edging up to 4.20% by the end of 2010.
Credit Suisse Group strategists also have soured on bonds, at least for the near term. From Bloomberg News:
Analysts at Credit Suisse Group advised investors to trim their holdings in government bonds and buy equities, reversing a recommendation from June. Investors should increase holdings of global equities to ‘overweight’ and reduce government bonds to ‘benchmark,’ according to Andrew Garthwaite, London-based global strategist. ‘Bonds no longer look attractive,’ Garthwaite wrote in a note to clients today. We expect ‘a positive macro [economic] surprise in the second half of the year. We believe that we are halfway through the first ‘V’ of an upward sloping W-shaped recovery, with a likely peak in the early fourth quarter.’
-- Tom Petruno