Treasury Buyers at Auction Face Losses in 2016 If BofA Is Right

  • BofA says 10-year yield may rise to 2.65% in 2016 outlook
  • Mizuho Asset says slow inflation makes U.S. notes attractive

Buyers at the U.S. 10-year note auction Wednesday will face losses in 2016 as the Federal Reserve raises interest rates, based on Bank of America Corp. projections. The benchmark securities fell for the first time in four days before the sale.

Yields on the debt may climb more than 40 basis points to 2.65 percent next year, Bank of America Merrill Lynch said in its 2016 market outlook Tuesday. An investor who buys the securities now would lose about 1 percent if the yield reaches that level by the end of 2016, based on data compiled by Bloomberg. The U.S. is scheduled to auction $21 billion of 10-year notes Wednesday.

“The firm’s house view is for stronger growth and higher rates,” according to the report on the company’s website. There will be a “gentle rise in inflation.” Bank of America’s Merrill Lynch unit is one of the 22 primary dealers that underwrite the U.S. debt.

Ten-year yields rose two basis points to 2.24 percent at 7:07 a.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent note due in November 2025 fell 1/8, or $1.25 per $1,000 face amount, to 100 4/32.

Fed Liftoff

The Fed will probably raise its main interest rate by a quarter percentage point this month, followed by three or four increases of the same amount in each of the next two years, according to the Bank of America report. Policy makers next meet on Dec. 15-16.

Investors are underestimating the pace of rate increases over the next two years, according to Scott Thiel, deputy chief investment officer for fundamental fixed income at BlackRock Inc., the world’s largest asset manager.

Thiel said at a briefing in London Wednesday that he favors longer-maturity Treasuries over shorter-dated notes.

The 10-year securities yielded 2.24 percent in pre-auction trading, compared with an average yield of 2.304 percent at a previous sale on Nov. 10. Investors bid for 2.58 times the amount available at that auction, versus 2.59 times in October.

The U.S. sold $24 billion of three-year notes Tuesday and plans to auction $13 billion of 30-year bonds Thursday.

The low U.S. inflation rate makes long-term Treasuries, including 10-year notes, attractive, said Yusuke Ito, a senior investor at Mizuho Asset Management in Tokyo. The yield on 2025 debt will be less than 2 percent by the end of next year, he said. The consumer-price index has been stuck near zero all year.

“There’s going to be continued downward pressure” on yields, said Ito, whose company has $40.7 billion in assets. “The economy continues to be sluggish, not only in the U.S. but all over the world.”

Ito is in the minority. The U.S. 10-year yield will climb to 2.80 percent by the close of 2016, according to median economist estimates in a Bloomberg survey.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE