Treasuries Strategists Cut Forecasts Again, Just as Yields Climb

  • U.S. 10-year note yield extends rise, reaches three-week high
  • Median economist projection fell between June and July surveys

Forecasters who have spent this year scrambling to catch up with plunging Treasury yields have encountered a new surprise: yields are on the rise.

Strategists cut their median year-end 10-year Treasury yield forecasts by almost half a percentage point from a month earlier in a July Bloomberg News survey. It’s the latest in a record series of downward revisions this year for strategists who entered 2016 expecting yields to climb.

The irony: just as economists were submitting their most recent changes, Treasuries reversed course, posting their biggest weekly loss in a year last week, as a brightening U.S. economic outlook and political clarity in the U.K. sapped demand for haven assets. The yield on the benchmark 10-year Treasury note rose to the highest in more than three weeks on Monday as Turkey’s President Recep Tayyip Erdogan regained control after Friday’s failed military coup against his government.

“This move back is probably a little bit of a surprise for a lot of people,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 23 primary dealers that trade with the Federal Reserve. “But it is not December 31. We’re only in July, so there’s still a lot of time.”

Yields Rise

U.S. 10-year note yields rose three basis points, or 0.03 percentage point, to 1.58 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, the highest closing level since June 23. They climbed 19 basis points last week, the biggest increase since June 2015, having dropped to a record 1.318 percent on July 6. The 1.625 percent security due in May 2026 fell 9/32, or $2.81 per $1,000 face amount, to 100 12/32.

The 10-year Treasury note yielded 2.27 percent on Dec. 31. That month, the median analyst forecast saw it rising to 2.78 percent by the end of 2016, helped by a strengthening U.S. economy and a Fed signaling it intended to raise interest rates four times this year.

Instead, global forces including a China-led economic slowdown and Britain’s vote to leave the EU pushed investors into haven investments, with global sovereign debt yields falling to record lows. Signs of economic weakness have pushed central banks abroad to boost stimulus, making it harder for the Fed to tighten policy despite encouraging U.S. data. Fed officials have cut their interest-rate projections twice this year.

In Bloomberg’s survey of 66 economists conducted from July 8 to July 13, the median forecast for the 10-year yield at the end of 2016 was 1.70 percent, down from a median of 2.14 percent in the June survey.

Economic Data

Granted, one week of rising yields may not be enough to convince strategists that the market is reversing course.

"Yields can certainly still fall,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer. “It’s not about absolute levels any more, it’s really about levels relative to the rest of the world, where yields are even lower.”

U.S. economic reports this week are forecast to show housing starts rose in June after contracting in May and continuing claims on unemployment benefits dropped in the week ended July 9, according to Bloomberg surveys of analysts.

Economic data last week showed U.S. retail sales rose more than forecast, while a core measure of price growth accelerated. Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or missed analysts’ forecasts, rose to the highest level since January 2015.

The probability of a Fed interest-rate hike this year has increased in recent days, though there’s still just a 41 percent chance according to futures pricing -- down from 50 percent when the U.K. voted on its EU membership on June 23.

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