Bank of America Corp. increased its year-end forecast for Treasury 10-year yields to 3 percent after data showed June employment exceeded projections, fueling speculation the Federal Reserve will reduce monetary stimulus.
“Today’s payroll data, in light of the Fed’s new reaction function, justifies a move higher in rates,” Bank of America Merrill Lynch said in a report. The company, one of 21 primary dealers that trade with the central bank, raised its 10-year forecast from 2.4 percent issued in early June.
The outlook for higher yields is also supported by so-called convexity hedging linked to mortgage-backed securities, increased yields on Japanese government securities and outflows from bond mutual funds, the report said. Treasuries may also be hurt as investors in emerging markets reduce duration and central banks liquidate dollar reserve assets to support their local currencies, it said.
U.S. 10-year note yields rose 22 basis points, or 0.22 percentage point, to 2.73 percent in New York, according to Bloomberg Bond Trader prices. It was the biggest one-day yield increase since August 2011.
Fed Chairman Ben S. Bernanke said last month policy makers may “moderate” their bond-buying program this year and may end it mid-2014 if growth meets forecasts. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said the Fed will begin tapering sooner than they had expected after today’s Labor Department report, which showed employers added 195,000 workers to payrolls for a second month in June. .
“Our economists have also revised their Fed calls since our last forecast -- we now expect tapering to be announced by the end of the year and the first Fed hike in mid-2015,” the report said.
The central bank has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.