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Treasury Yields to Rise as Economy Avoids Double Dip, BofA Says

Treasury 10-year note yields will increase as much as 72 basis points from the lowest level since April 2009 by year-end as the U.S. economy avoids a double-dip recession, according to Bank of America Corp.

“Data will ultimately tip in favor of higher rates,” Priya Misra, head of U.S. rates strategy in New York, said at a press briefing today. “Then investors will start looking to selling rates.”

Bank of America expects the 10-year yield to rise to 3.25 percent “in the near term” and reach 3.75 percent by the end of 2010. The yield will reach 3.15 percent by the end of the second quarter and 3.74 percent at year-end, according to the average forecast of 64 economists in a Bloomberg News survey, with the most recent forecasts given the heaviest weightings.

The yield on the 10-year note fell seven basis points, or 0.07 percentage point, to 3.04 percent, according to BGCantor Market Data. It earlier touched 3.0245 percent, the lowest level since April 29, 2009. The yield dropped to its all-time low of 2.0352 percent on Dec. 18, 2008, in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy.

U.S. debt rallied today as a report showed inflation was contained last month and economists said nonfarm payrolls figures later this week will show employers eliminated 115,000 jobs in June. Group of 20 leaders said over the weekend that advanced economies plan to cut their deficits in half by 2013, allowing them to curb record bond sales.

Two-Year Yield

The two-year note yield fell two basis points to 0.63 percent after earlier dropping to 0.62 percent, the lowest level since Nov. 27. The yield is approaching the record low of 0.6044 percent set Dec. 17, 2008, after the Federal Reserve cut its target for overnight lending to a range of zero to 0.25 percent.

Much of the negative economic expectations have been priced into shorter-term debt, according to Misra. While reports show the recovery may be slowing, only indications of something more serious than a reduction in the pace of growth will bring Treasury yields lower, she said.

“If you’re looking to go lower, it has to be on risk of double-dip or another recession,” Misra said.

U.S. economic reports will have more of an effect on Treasuries than Europe’s sovereign-debt crisis or China’s plan to let its currency appreciate, she said.

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