Great Rotation Trigger Is 3% Yields, Rosenberg Says: Tom Keene

Yields on benchmark 10-year U.S. Treasury notes need to rise higher than 3 percent to prompt investors to flee the bond mutual funds for equities, according to Jeffrey Rosenberg of BlackRock Inc.

“You’re going to need to see some significant and protracted losses in the bond market to see the great rotation” into equities, Rosenberg, BlackRock's chief fixed income strategist, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene. “That yield is going above 3 percent. It’s no where near that right now.”

Treasuries rose today, with yields on benchmark 10-year notes falling three basis points, or 0.03 percentage point, to 2 percent at 2:12 p.m. New York time, according to Bloomberg Bond Trader data.

Investors are fleeing money-market funds and traditional savings accounts, more than Treasuries, in favor of such investments as equities and junk bonds, Rosenberg said, as the Federal Reserve’s $85 billion-a-month asset-buying program continues to pressure yields downward.

“The problem with the Fed policy is interest rates, at 2 percent for the 10-year, are below the level of inflation,” said Rosenberg. “People are reaching to get a yield that is above the level of inflation to protect their savings. When interest rates are set by the Fed to be so low, for so long, that behavior eventually shows up.”

Fed Action

The dollar dropped to a one-week low today against the euro as a report showed U.S. inflation is contained, giving the Fed scope to maintain its monetary stimulus program. The U.S. currency headed for its first weekly loss against the 17-nation currency since February before the Federal Open Market Committee meets next week to review its bond-buying program.

U.S. consumer prices increased 2 percent in the 12 months ended in February, after a 1.6 percent year-over-year gain the prior month, a Labor Department report showed today in Washington.

“There are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability,” Fed Vice Chairman Janet Yellen said in a March 4 speech in Washington.

Fed policy makers indicated in December that an “exceptionally low” target interest rate is appropriate as long as inflation isn’t forecast to rise to more than 2.5 percent and unemployment stays above 6.5 percent.

Saver Impact

The FOMC cut its target interest rate to a range of zero to

0.25 percent in December 2008, where it has stayed since. The committee at its Jan. 29-30 meeting said it will continue its monthly bond purchases until the labor market improves substantially.

“Bernanke and the Fed talk very much about unemployment, about getting the economy going, but what about the impact on saver?” Rosenberg asked. “Savers don’t simply sit back and accept negative real returns -- they take actions. They take on greater risks. And that’s one of the problems that, when not addressed in the form of rising interest rates from policy makers, then what you get is potential for asset inflation leading into asset bubbles.”

Fed Governor Jeremy Stein said last month that some credit markets, including leveraged loans and junk bonds, show signs of overheating. Kansas City Fed President Esther George has warned that prices of some farm land have hit “historically high levels.”

Stocks have also gained, with the Dow Jones Industrial Average at an all-time high and the Standard & Poor’s 500 Index almost at its 2007 peak.

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