Treasury 10-Year Yield Will Fall Below 2%, Bank of America Says

Treasury 10-year note yields will drop to an all-time low of 2 percent in the first quarter of 2011 after the Federal Reserve expands its purchases of U.S. debt, according to Bank of America Corp.

The Fed will purchase $500 billion to $750 billion of Treasuries over six months and possibly more as needed to support the economy in a second round of quantitative easing, according to Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch.

“Our economists are looking for the Fed to embark on an expansion in its balance sheet,” Misra wrote in a research note to clients today. “This should lower the 10-year Treasury rate to below its historic lows.”

Bank of America’s 2 percent forecast for the yield in the first quarter is 1.19 percentage points below the average forecast of 72 analysts in a Bloomberg News survey. Misra said on June 28 that 10-year note yields would increase to 3.25 percent in the near term and 3.75 percent by year-end.

The yield on 10-year note increased today for the first time in three days, rising 0.11 percentage point to 2.58 percent, as a report showed manufacturing in the U.S. expanded at an unexpectedly faster pace in August. The yield dropped on Aug. 25 to a 19-month low of 2.4158 percent on concern the economic recovery is stalling. The yield fell to the record low of 2.0352 percent in December 2008.

The central bank said at the conclusion of its Aug. 10 meeting that it would resume buying Treasuries after judging that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” The Fed has bought $10.185 billion of U.S. debt since the program began Aug. 17.

Fed Bond Buying

The Fed was the biggest buyer in the Treasury market in 2009 as it purchased $300 billion in U.S. debt to help keep borrowing costs low and bolster the housing market.

Bank of America Merrill Lynch cut U.S. economic growth forecasts for the rest of this year and next. The world’s largest economy will expand at an average 1.65 percent annual pace from July through December and grow 1.8 percent in 2011, a half point less than previously estimated.

The U.S. economy grew at a 1.6 percent annual pace in the second quarter, down from an estimate of 2.4 percent issued in July, revised figures from the Commerce Department showed last week.

The Fed signaled in minutes of its Aug. 10 meeting released yesterday that easier monetary policy is no sure thing, saying some officials were concerned investors would misinterpret the decision to put a floor on securities holdings.

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