Citigroup Sees Treasury Yields Falling Toward 2.3%

(Bloomberg) -- Ten-year Treasury yields should fall toward 2.30 percent as U.S. economic data continues to disappoint, according to Citigroup Inc.

With Federal Reserve rate hikes on hold, investors should buy bonds, though not necessarily sell stocks, strategists including Jeremy Hale wrote in a note to clients Thursday.

“Fed pauses have nearly always seen Treasury yields fall with the average being around 100 basis points,” they said. “We think the 2.54 percent recent yield high peaked exactly where technical resistance said it should and the move lower again may now extend to 2.30-2.35 percent.”

The Fed could end up cutting rates more than the roughly two reductions expected by the market over just more than a year, according to the Citi team. The world’s biggest economy has lost momentum with only the labor market looking robust -- and even that is a lagging indicator that gave next-to-no leads on recessions in the 1970s and 2000s, they said.

Further weighing on the growth outlook is a Fed that now seems to believe there is more slack in the U.S. jobs market to unwind before inflation starts to climb, they added.

“Real yields look low compared to prior Fed cycles but are still lagging the recent weakness of U.S. data,” according to the note. “Given these conflicting signals, we feel its cleaner simply to anticipate lower nominal yields over time.”

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