Post-Fed Calm in Treasuries Masks a Raging Bulls-Bears Debate

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  • (Bloomberg) -- The Federal Reserve’s rate hike is in the rear view mirror, Treasuries volatility is tumbling and the consensus on Wall Street is for 10-year yields to tread water through June.

    Yet beneath that apparent calm, the range of forecasts in the latest Bloomberg survey underscores that a debate is simmering over whether long-term yields are poised to enter a bear market or just keep bumping around in months-old ranges.

    Ten-year yields will rise to 2.65 percent by the end of next quarter, from about 2.5 percent now, according to the median estimate of 53 analysts surveyed by Bloomberg through March 17. After the Fed’s decision last week, that forecast is almost 10 basis points higher than foreseen a month ago, and it encompasses predictions ranging from 2.2 percent to 3 percent.

    Yields have been stuck in a range of 34 basis points since the start of December, capped on the upside by demand in the face of looming geopolitical risks, and on the downside by the specter of the global reflation trade and potential fiscal stimulus. For traders seeking clarity this week, there’s a spate of Fed speakers, headlined by Chair Janet Yellen on March 23.

    “The 10-year Treasury is a global asset and is now more of a reflection of capital flows than it is of monetary conditions here,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago, whose forecast matches the median. “We are entering a period now where international uncertainty from Brexit and with the upcoming elections in France” will cap yields.

    At the same time, an improving economy and the prospect of more Fed tightening pressures yields higher, Tannenbaum said. He predicts hikes in September and December, and sees 10-year yields at 3 percent at year-end. The Fed’s latest forecasts also call for two more hikes in 2017.

    The survey’s most bearish forecasts belong to Bank of America Corp. and Capital Economics Ltd. On the flip side, HSBC Holdings Plc is the biggest bull. Forward signals embedded in the yield curve show traders see 10-year yields at 2.57 percent by the end of June.

    Gross’s Marker

    To Bill Gross, the bond-market veteran at Janus Capital Management, a sustained break above the 2.6 percent mark is needed to signal the start of a bear market, should it hold on a weekly or monthly basis. Benchmark 10-year yields haven’t exceeded about 2.64 percent, their recent peak from December, since 2014.

    Even last week’s Fed hike failed to bust yields from their range, after policy makers left unchanged their projected path of increases for this year and next, dashing speculation that officials would adopt a more hawkish stance.

    Yields have plateaued after surging from a record low of 1.32 percent touched in July, buoyed by President Donald Trump’s promises of tax cuts, deregulation and fiscal spending.

    In the derivatives market last week, at least one investor grew more certain about the outlook for yields in the very short term. Over the course of the week, a new position was built up by over 100,000 contracts in April Treasuries puts targeting 10-year yields to rise to around 2.70 percent, according to CME data. The expiry on the option is March 24, data compiled by Bloomberg show.

    Events of note this week:

    March 20Chicago Fed Nat Activity Index
    U.S. sells 3M, 6M Bills
    Fed’s Evans in New York
    March 21Current Account Balance
    U.S. sells 4W Bills
    Fed’s Dudley in London
    Fed’s George in Washington
    Fed’s Mester in Richmond
    March 22MBA Mortgage Applications
    FHFA House Price Index
    Existing Home Sales
    March 23Initial Jobless Claims
    Bloomberg Consumer Comfort Index
    New Home Sales
    Kansas City Fed Manf. Index
    Fed’s Yellen in Washington
    Fed’s Kashkari in Washington
    Fed’s Kaplan in Chicago
    March 24Durable Goods
    Markit US Manufacturing PMI
    Fed’s Evans in Washington
    Fed’s Bullard in Memphis
    Fed’s Dudley in New York

    Bloomberg