- Best estimate for Fed liftoff is March, Invesco's Gibbs says
- Traders see 66% chance Fed will delay rate increase until 2016
Treasury 10-year yields will probably stay below 2.50 percent as the Federal Reserve will probably start raising interest rates later and more slowly than earlier predicted, according to Invesco Ltd.
The Atlanta-based manager of about $780 billion says it’s largely steering clear of developed-market sovereign debt and its “best estimate” for the first U.S. policy tightening since 2006 is not until in March. Futures traders have reduced bets for liftoff this year after a China-led selloff erased close to $10 trillion from global equities in the three months through September.
“Our expectation is that they would have started to tighten by now except that the global economy is playing more into their thinking,” Carolyn Gibbs, a senior portfolio manager at Invesco, said in an interview in Tokyo on Tuesday. “Even with Fed liftoff -- when it does start -- we think they will be measured in their approach, and from the perspective of long-term Treasury yields, we don’t see dramatic increases.”
The benchmark 10-year note yield was little changed at 2.04 percent as of 6:42 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 99 22/32. The yield has dropped from this year’s high of 2.50 percent set on June 11.
The chance that the Fed will wait until at least 2016 before raising rates has risen to 66 percent, from 40 percent odds at the end of August, according to data compiled by Bloomberg based on futures. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
Invesco also sees factors such as an aging U.S. population and a slower expansion of the workforce, helping to keep a cap on yields.
“The economy doesn’t have the same growth potential, and as a result we won’t see bond yields rising to the degree that we’ve seen in the past,” Gibbs said. “We see fair value on the U.S. 10-year at 2.50 percent, but we also believe that, given low developed-market bond yields globally, there will be foreign demand for U.S. Treasuries that’s likely to keep yields below that level.”
Treasury 10-year yields near 2 percent compare with 0.57 percent for similar-maturity German bunds and 0.305 percent for Japanese government bonds.
Strategists at Standard Chartered Plc, which does see a rate increase in 2015, also don’t see yields climbing above 2.5 percent by the end of this year.
“Our year-end forecast for the 10-year Treasury yield remains 2.30 percent, which it has been since mid-March,” said John Davies, an interest-rate strategist at Standard Chartered in London. “All through this year we have held the view that the 10-year yield will tend to inhabit a 2.00-2.50 percent range, which should then be used as guide to being underweight or overweight duration. We remain comfortable with the idea that 10-year yield will drift higher towards 2.30 percent by year-end as we still expect a December Fed rate hike amid some retreat in uncertainty about the domestic and international outlook.”
U.S. government securities have returned 2.6 percent in the past three months, according to Bloomberg World Bond Indexes, as signs of a slowing Chinese economy spurred demand for the safest securities. Imports to the Asian nation slid 17.7 percent in yuan terms in September from a year earlier, a report showed Tuesday.