Salient to Investors:
OMB predicts yields on 10-yr Treasuries will rise to average 4.1 percent in 2015 and 4.9 percent in 2017 as the economy expands at a 4 percent rate in half2 of Obama’s term. The bond market indicates the yield will average below 3 percent two years from now, implying that GDP will be less than OMB projections. The median economist expects GDP will grow 2.7 percent in 2014 versus the OMB forecast of 3.5 percent. GDP growth averaged 3.3 percent in the decade prior to the financial crisis.
Treasury borrowing costs just above 2012’s record lows mean easy credit for consumers and companies and sustained demand for riskier assets such as stocks.
Priya Misra at Bank of America Merrill Lynch said clearly the bond market is at one end of the spectrum and Washington is at the other end. Misra said the 10-yr yield rising to 5 percent in 4 years is too optimistic because this is nothing like a normal recovery.
Guy LeBas at Janney Montgomery Scott said that over the last couple of years the Fed et al were overly optimistic on their growth expectations, and its very unlikely that higher growth, increasing inflation expectations and reduced Fed demand will all come into play in 2013 or 2014. LeBas sees the 10-yr yield ending 2013 at 2.2 percent.
Alan Wilde at Baring Asset Mgmt said strong headwinds in every direction are working against returning to pre-2007 growth levels, so the idea that bond yields could return to 4 percent to 5 percent, with a nominal growth rate compatible with stable employment, is some way off. Wilde predicts gently rising yields and not a rapid burst higher.
Zach Pandl at Columbia Mgmt Investment Advisers said we can’t take market implied forward rates at face value because central banks are deliberately distorting those rates to stimulate recovery.
James Smith at Parsec Financial said rising home and car sales show the economy is improving and sees the 10-year Treasury yield at 4.11 percent at the end of 2013. Smith said flight-to-quality and Fed purchases has kept yields below the historic 100-year average of 3 percent over the inflation rate, but Fed buying won’t last forever and the economy is back to looking more like a typical expansion. Smith said market expectations always turn on a dime and nobody sees it coming.
Free email alerts of articles as soon as they are posted.