Treasury Yields to Stay Low, Fidelity’s Irving Says: Tom Keene

U.S. Treasury yields will remain at or close to record lows into next year as headwinds from Europe and a potential U.S. fiscal contraction tempers growth, according to Fidelity Management & Research’s Bill Irving.

The $600 billion of potential tax increases and spending cuts scheduled to go into effect starting next year that’s become known as the fiscal cliff, risks from the euro-zone crisis and Federal Reserve debt purchases will prevent a rise in yields, the Merrimack, New Hampshire-based Irving in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“I am not preparing for a rising yield environment because we have all these headwinds,” said Irving, manager of the $3.8 billion Fidelity Inflation-Protected Bond Fund. “Yields are going to stay low. The Fed is going to continue to put pressure on long-term Treasury yields.”

Fed policy makers began a third round of debt purchases in September, buying $40 billion per month in mortgage-backed securities, and said they will probably hold the federal funds rate close to zero “at least through mid-2015.” Those purchases add to the about $45 billion a month in long-term Treasuries the central bank is buying through its maturity extension program known as Operation Twist, slated to end in December.

“When Operation Twist ends at the end of the year they then proceed, continuing with the Treasury purchases,” said Irving, noting the Fed will end its sales of short-term debt. “By the time this is all done, the Fed’s balance sheet will be on the order of around $4 trillion.”

Fiscal Cliff

European Central Bank President Mario Draghi endorsed last month an unlimited bond-purchase program to contain rising yields in the euro area and fight speculation that nations might leave the 17-nation currency.

The fiscal cliff is a “triple witching hour; the scheduled sequestration cuts, the expiration of the Busch-era tax cuts, and the expiration of the fiscal-stimulus measures,” Irving said. “All combined, if were to fall off of the fiscal cliff, that would push the economy back into a recession -- which ironically would be good for bonds.”

The Congressional Budget Office has warned the economy will fall into recession if Congress allows the tax increases and budget cuts to go ahead.

The International Monetary Fund yesterday cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies.

Mortgage Market

The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013.

The Washington-based lender’s report called for U.S. policy makers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession. The U.S. is seen expanding 2.2 percent this year, higher than an earlier forecast, and growing 2.1 percent next year, less than previously predicted, the IMF report said.

The Fed’s efforts to revive the economy through its quantitative-easing measures, will buttress the mortgage market, according to Irving.

“The Fed throughout the next year is going to be very supportive of the agency mortgage backed securities market,” Irving said in the radio interview.

The U.S. economy added 114,000 workers last month after a revised 142,000 gain in August that was more than initially estimated, Labor Department figures showed last week in Washington. Unemployment unexpectedly fell to 7.8 percent in September, the lowest since President Barack Obama took office in January 2009, as employers took on more part-time workers.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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