JPMorgan Joins Chorus of Banks Cutting Treasury Yield Forecasts

  • Benchmark 10-year note projection reduced to 1.9% from 2.15%
  • Analysts cite slowing growth expectations, global easing

Another day, and another one of Wall Street’s biggest banks cuts its Treasury yield forecasts.

JPMorgan Chase & Co. analysts led by Alex Roever joined a growing chorus of banks to pare year-end projections for the 10-year note yield, trimming their estimate to 1.9 percent from 2.15 percent. That’s because investors expect a slower pace of U.S. economic growth than they did last year, Treasury yields are more sensitive to global monetary easing and investors don’t want to take much risk by betting on Federal Reserve tightening, the analysts said.

Their call still would require yields to climb more than 10 basis points from current levels, which would indicate about a 0.2 percent loss in 10-year debt by the end of the year. Benchmark yields rose five basis points, or 0.05 percentage point, to 1.76 percent on Monday as of 5 p.m. in New York, the biggest one-day climb since April 20. A gain in oil prices was the catalyst for the move, according to a Monday note from BMO Capital Markets analysts.

Strategists across Wall Street have been paring back 2016 calls on benchmark Treasury yields, as expectations for global economic growth decline and central banks in Europe and Asia introduce additional policy easing. Since the end of last year, the median second-quarter 10-year yield estimate from 66 strategists polled by Bloomberg has dropped to 1.9 percent from 2.55 percent. For the end of the year, the median estimate has dropped to 2.2 percent from 2.78 percent.

Even as the JPMorgan strategists cut their year-end yield forecasts, they expect Treasuries to fall in the near term and recommend clients bet on declines in the five-year note. The yield on that security rose six basis points to 1.26 percent.


Fed View

The decision wasn’t tied to any changes in the bank’s views on Fed interest-rate policy. JPMorgan’s economists still forecast officials will raise their benchmark interest rate twice this year. Roever and other strategists at the bank compared the call with the “conundrum” experienced by Alan Greenspan during his tenure as Fed chairman.

“Is it a contradiction in terms to look for higher Fed funds rates, but still-low long-term rates? Perhaps, but there are precedents,” the analysts wrote in a May 13 note to clients. Fed Chair Janet Yellen “has a conundrum also, although hers is more challenging given the conditions of the rest of the developed markets. Still, challenging doesn’t mean impossible.”

The chances traders assign an interest-rate increase by the end of this year rose to about 57 percent Monday, up from 47 percent on Friday, according to overnight-indexed swaps data compiled by Bloomberg.

The move by JPMorgan echoes similar calls from other banks that have cut their 10-year yield forecasts this year, as demand from overseas investors facing negative interest rate policies has boosted the appeal of U.S. debt.

Goldman Sachs Inc. last week trimmed its forecast and now predicts 10-year notes to yield 2.4 percent by year-end, down from 2.75 percent previously. The 10-year note yield may sink to 1.5 percent, Citigroup Inc. U.S. rates strategist Jabaz Mathai wrote in a May 6 note to clients.

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