Most-Accurate Forecaster Herrmann Sees 0.28% U.S. 2-Year Yield

Two-year Treasury yields will continue hitting record lows and drop to 0.28 percent by the end of the year, according to John Herrmann, senior fixed-income strategist at State Street Global Markets LLC and that rate’s most accurate forecaster in an analysis by Bloomberg Rankings.

“Central bank demand and investor demand should really keep the two-year yield tracking toward our target,” Herrmann said yesterday, after the Federal Reserve announced it will buy an additional $600 billion of Treasuries through June to stimulate growth. The yield fell about two basis points to 0.33 percent yesterday, just above its all-time low 0.3270 percent on Oct. 12.

Bloomberg also ranked forecasters of three other key rates, calculating the average difference between their predictions in every January starting with 2007 for each of the coming year’s quarters and the actual rate as of each period’s close.

Herrmann’s two-year-yield forecasts, covering 11 quarters and issued before he joined State Street in February, were within about 37 basis points of the mark on average. Herrmann, who previously worked at his own consulting firm and Merrill Lynch & Co., didn’t submit calls for four of 15 quarters covered in the analysis.

As things stand now, his January prediction for this quarter won’t be among his most accurate. With the two-year yield at about 0.92 percent back then, Herrmann saw it hitting 1.5 percent by year-end. He had lowered his forecast to 0.70 percent by September and then cut that prediction by 42 basis points on Oct. 13, making his the second lowest forecast among 54 compiled by Bloomberg.

“I’m going to stick with that,” Herrmann said after the Fed’s announcement yesterday.

A summary of the rankings, which are based on forecasts available via the Bloomberg’s BYFC function, is below. For the complete list, click here.

 Name            Firm                   Forecast   Average Error
 Kurt Karl        Swiss Re Financial     Fed Funds        0.2667
 John Herrmann    State Street Global    2-Yr Treasuries  0.3718
                  Markets LLC
 Nathaniel Karp   BBVA USA Inc.          10-Yr Treasuries 0.4672
 James DeMasi     Stifel Nicolaus & Co.  3-Month Libor    0.5427

Source: Bloomberg
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