Treasuries Seen Stalling Near 2% Yield as Long as Fed in Pictureby
Traders push out expectations for first Fed boost to 2016
Societe Generale lowers year-end 10-year forecast to 2.1%
As Treasury yields hover close to the lowest since August, almost no one on Wall Street expects them to fall much more in 2015, even with lackluster economic data and a Federal Reserve that’s looking increasingly divided over policy.
While the benchmark 10-year yield dipped below 2 percent this week on weaker-than-forecast retail sales figures, not one of the 63 analysts tracked by Bloomberg expects it to stay that low. The median projection is for the rate to climb to 2.3 percent.
Even strategists at Societe Generale SA, who cut their year-end forecast for the 10-year yield in an Oct. 15 report, say we’ve seen most of the declines. The strategists lowered the projection to 2.1 percent from 2.5 percent, but said that for Treasuries to sustain a rally from here, the Fed would need to stay on hold forever. Fed Chair Janet Yellen has said a rate boost this year would be warranted.
"It’s difficult to price in a more dovish path from here," said Bruno Braizinha, a strategist with the group in New York. The bank is one of the primary dealers that trade with the Fed. "Any more than this, the market would be pricing in such a dovish path that would essentially mean no hikes."
The yield on the 10-year note fell about five basis points this week, or 0.05 percentage point, to 2.03 percent. It dropped toward levels seen in the wake of the August market turmoil fueled by China’s surprise yuan devaluation. The 2 percent note maturing in August 2025 rose about 1/2, or $5 per $1,000 face amount, to 99 22/32.
Wall Street analysts have been caught with overly pessimistic Treasuries forecasts before. In January, when 10-year notes yielded about 1.7 percent, the median forecast was for it to reach 2.8 percent by year-end. The peak this year was 2.5 percent in June.
The yield has dropped since then as investors pushed out Fed bets. Futures traders see a 32 percent chance of an increase by December, according to Bloomberg data, assuming the effective fed funds rate will average 0.375 percent after the first boost. The probability is down from 43 percent at the start of the month. For March, the likelihood has dropped to 55 percent, from 66 percent at the start of the month.
The central bank has kept its target near zero since 2008 to support the economy. Officials have said their decision on whether to raise the benchmark will depend on the resilience of the economy in the face of slowing overseas growth.
Fed Bank of New York President William C. Dudley on Thursday said the central bank should still raise interest rates this year as long as the economy stays on track. He also cautioned that recent data signal growth may be slowing. On Tuesday, Fed Governor Daniel Tarullo said he doesn’t currently favor an increase in 2015. Both officials vote on rate decisions.
While U.S. government figures this week showed jobless claims unexpectedly dropped to a four-decade low, retail sales fell short of analysts’ expectations. On Oct. 2, a Labor Department report showed the economy added 142,000 jobs in September, trailing the median forecast.
This month, 10-year yields have reached as high as 2.14 percent on Oct. 9, and as low as 1.9 percent on Oct. 2.
"There’s not a whole lot of conviction either way, and we’re really where we left this market two weeks ago," said Gennadiy Goldberg, an interest-rates strategist in New York with TD Securities, another primary dealer. "You have the market treating every piece of data or key speech as a potential turning point."