Treasury Selloff Is About to End If Consensus Forecast Is Right

  • Fed rate hike in December is ‘strongly priced in’: Mizuho
  • Ten-year note yields to end 2016 at 1.75%: Bloomberg survey

A second-half selloff in the world’s biggest bond market is coming to an end, judging by the forecasts from 65 economists.

Treasury 10-year yields have risen about 22 basis points to 1.82 percent in October as investors prepared for the Federal Reserve to raise interest rates. It’s the biggest monthly increase since June 2015. The median forecast among the economists surveyed by Bloomberg is for 1.75 percent by Dec. 31, suggesting the selloff has gone too far.

“I don’t see much more upside risk for Treasury yields,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “A hike in December is really strongly priced in and what we expect to see in December is more evidence of the Fed acknowledging that structurally the neutral rates of interest in the U.S. is moving lower.”

The benchmark Treasury 10-year note yield rose three basis points, or 0.03 percentage point, as of 10:21 a.m. in London, based on Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 97 5/32.

Chatwell predicts yields will fall to 1.75 percent by year-end and hold at that level by the end of 2017. “We see good value in Treasuries here and don’t see upside risks to yields from here,” he said.

Some Fed policy makers are already signaling that the future path of interest rates is likely to be subdued. St. Louis Fed President James Bullard said this week that low rates “are likely to continue to be the norm over the next two to three years.”

Done Deal

Rick Rieder, the global chief investment officer for fixed income at BlackRock Inc. said he considers a December Fed rate hike a done deal, speaking earlier this week at a conference. BlackRock, based in New York, is the world’s biggest money manager with $5.1 trillion of assets under management.

The Treasury is scheduled to sell $28 billion of seven-year notes Thursday. The day’s economic data include durable goods orders, which held unchanged in September, according to a Bloomberg survey of economists. Weekly initial claims for jobless insurance fell, based on the responses to a separate survey.

While the U.S. bond selloff was driven by rising inflation expectations, the latest figures show costs are holding in check.

One of the inflation gauges the Fed monitors shows prices are rising at a 1 percent rate in the U.S., half the central bank’s target.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 1.74 percentage points, the highest since August 2015.

“Now it’s a good time to buy,” said Hideo Shimomura, the chief fund investor at Mitsubishi UFJ Kokusai Asset Management, which oversees about $115 billion. “I don’t fear an inflation risk in the U.S. Yields should come down.”

A rising term premium is helping make Treasuries more attractive, Shimomura said. The figure has climbed to minus 43 basis points from minus 76 basis points in July, which was the lowest in Fed data going back to the 1960s. A reading below zero indicates the debt is theoretically overvalued.

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