Treasury yields will “trend sideways” through September amid tepid economic growth before rising at year-end as the Federal Reserve begins scaling back its debt buying, according Standish Mellon Asset Management Company LLC.
An increase in the payroll tax at the start of the year and automatic, across-the-board cuts in federal spending that began taking effect March 1 pose risk to growth in the U.S. gross domestic product, the firm said in a client note today.
“We continue to be concerned about the risk of a mid-year slowdown resulting from the tax hikes and spending cuts amounting to 2.2 percent of GDP, which went into effect over the past few months,” Thomas Higgins, global macro strategist in Boston at Standish, the debt management group of Bank of New York Mellon, with $167 billion of fixed-income assets under management, wrote in the note. “We expect the Federal Reserve to stay the course with its $85 billion per month quantitative- easing program until late this year, when we are projecting a pickup in economic activity.”
Treasury 10-year note yields touched the lowest level since December today after data from China and the euro area added to evidence that global growth is faltering and spurred demand for the safest assets. The benchmark yields reached 1.64 percent, the lowest level since Dec. 12, before trading little changed at 1.7 percent.
“We expect Treasury yields to trend sideways during the second and third quarters before rising toward year-end,” Higgins wrote.
The Fed cut its benchmark rate for overnight loans between banks to between zero and 0.25 percent in December 2008 as credit markets froze in the wake of the collapse of Lehman Brothers Holdings Inc. The central bank purchased $2.3 trillion of securities between November 2008 and June 2011, and currently buys $85 billion of mortgage-backed securities and Treasuries a month to combat deflation and stimulate investment in risk assets.
A much more “transparent” Fed that will “telegraph its message to investors well in advance of any change in policy” means yields will only rise gradually, as they did in 2004 when the central bank was increasing rates, Higgins wrote in the note.
“We remain bullish on the U.S. dollar, given political uncertainty in Europe and the Bank of Japan’s aggressive policy stance,” Higgins wrote.
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