Citigroup Forecasts Drop in Long-Bond Yields to 2.1%: Technical Analysis
Treasury 30-year bond yields may fall below 2 percent as the Federal Reserve is more likely to extend the average maturity of its holdings than to buy more securities, according to Citigroup Global Markets.
A technical indicator known as a double top in a chart of long-bond yields indicates a decrease to as low as 1.8 percent with a drop “at least” to 2.1 percent, Tom Fitzpatrick, chief technical analyst at the Citigroup Inc. unit in New York, wrote today in a research note with his colleagues Shyam Devani and Jim Zhou.
“It is far from clear at this point that the dynamics of the U.S. economy require” Fed balance-sheet expansion, the analysts wrote. “That is why we believe it is much more likely that the next Fed move is a balance-sheet ‘extension’ rather than ‘expansion’ to drive the last part of the curve into negative real yields.”
Yields on 30-year bonds dropped six basis points, or 0.06 percentage point, to 3.09 percent at 3:42 p.m. New York time, according to Bloomberg Bond Trader prices. Yields fell to a record low 2.51 percent in December 2008.
The difference in yields between 30-year Treasuries and inflation-indexed debt, a measure of the outlook for consumer prices known as the break-even rate, fell to 2.30 percentage points after touching 2.38 percentage points, the biggest spread since Oct. 28.
Bernanke’s View
Fed Chairman Ben S. Bernanke said yesterday the central bank is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.
The Fed said yesterday it would continue to extend the average maturity of its $2.6 trillion securities portfolio, a move dubbed “Operation Twist.” The central bank also maintained its policy of reinvesting maturing housing debt into agency mortgage-backed securities.
Buying more securities to boost economic growth risks driving up commodity prices, which may undermine the stimulus, Fitzpatrick said in a telephone interview.
“I still suspect that that will be a last-ditch measure and honestly believe it would be the wrong thing to do,” he said. “The negative kickback can be fairly instantaneous.”
In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. A double top occurs when a security makes two consecutive peaks of about the same depth, indicating it may drop.
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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