Citigroup Says 10-Year Yield May Drop to 1.5% as Treasuries Gain

  • Benchmark `highly likely' to fall near record low, bank says
  • Goldman Sachs, Bank of America push back Fed rate expectations

Treasury benchmark yields may fall toward record-low levels on slowing U.S. economic growth and demand from overseas investors, according to Citigroup Inc.

The 10-year note yield may sink to 1.5 percent, U.S. rates strategist Jabaz Mathai wrote in a May 6 note to clients. That’s after data last week showed the U.S. added fewer jobs than forecast in April, challenging the Federal Reserve’s quest to raise interest rates. Higher yields than most other developed countries also boost the appeal of U.S. debt, according to Citigroup, one of 23 primary dealers that are obligated to participate in Treasury sales.

"With little in the way of wage inflation at the moment, there is more room for the Fed to stay on the sidelines," Mathai wrote. "The longer end of the curve arguably has more room to move. We are partial to the view that a test of 1.5 percent is highly likely."

Treasuries have returned 3.6 percent this year, according to Bank of America Merrill Lynch index data, as traders back away from bets on Fed policy tightening amid signs of slowing global growth. Futures traders have all but ruled out the possibility of a rate increase at the Fed’s next policy meeting in June, even after several officials recently said they were still considering that option. Economists at Goldman Sachs Group Inc. and Bank of America last week pushed back expectations for the next rate boost to September from June.

The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 1.75 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 rose 1/4, or $2.50 per $1,000 face amount, to 98 7/8. The yield touched a record 1.38 percent in July 2012.

Rate Odds

Bonds rose Monday as crude-oil prices fell. Yields on two-year notes, which are more sensitive to Fed policy expectations, fell three basis points to 0.71 percent.

"The Treasury market is taking the bulk of today’s direction from the energy sector," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "There is also the ongoing reevaluation of Fed tightening expectations during 2016."

The odds of a rate increase in June are about 4 percent, rising to 44 percent for a move by year-end, according to data based on fed fund futures compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase.

The gap between yields on two-year notes and 10-year securities, known as the yield curve, was at 104 basis points. It flattened May 6 to 98 basis points, the least since March.

"The Fed will be lucky to raise rates again this year," strategists and economists led by Dominic Konstam at Deutsche Bank AG wrote in a note May 6. "While we continue to forecast a flat trajectory of 10-year Treasury yields at 1.75 percent through year end, we see growing risks of an endogenous slowdown that could produce a substantial bullish flattener."

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