50 subject one dollar note sheets sit in a stack before receiving a serial number and the U.S. Treasury and U.S. Federal Reserve seals at the U.S. Bureau of Engraving and Printing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Citigroup Says Buy 3% 10-Year Treasuries, Target Rally to 2.65%

(Bloomberg) -- Who wants to buy U.S. Treasuries at these levels? Citigroup Inc., for one.

With the longest selloff in a year stalling, Citigroup strategists Jabaz Mathai and Jason Williams say go long duration by purchasing 10-year notes at about 3 percent. They’re targeting a rally that pushes the yield down to 2.65 percent, according to a note released Thursday. They’d add to their position on a selloff up to 3.1 percent, but would stop out at a close over 3.15 percent.

Investors in the world’s biggest bond market are weighing how much further yields can rise after they touched the highest levels in four years this week. The median estimate among 57 analysts surveyed by Bloomberg is for the 10-year rate to climb gradually for the rest of 2018, to 3.14 percent by year-end. It fell three basis points to just below 3 percent on Thursday.

While an onslaught of debt issuance has weighed on the Treasury market, “the upcoming increase in supply for the next quarter is already priced in,” Mathai and Williams wrote.

Meanwhile, losses in Treasuries will likely be contained by equity markets that are still skittish about what higher rates will mean, they said. In February, a sharp rise in U.S. yields helped spark a brief stock-market rout.

“Equity markets are reacting negatively to increases in Treasury yields,” the strategists wrote. “A further sell off in rates will be held in check by the feedback loop from equity markets.”

The main risk, they say, is that crude prices continue to climb, pushing breakeven inflation rates higher and Treasury yields as well.

Citi isn’t alone in questioning how much higher yields will rise. BMO Capital Markets strategists on Thursday pondered a formation known as a “double top” for the 10-year yield at around 3.033 percent, the approximate intraday high over the past two sessions. They’re less aggressive in their snapback, seeing 2.851 percent as a potential destination.

Just a day ago, it seemed no one wanted to step in front of climbing yields. Now that the market has proved it won’t decline every session, it seems some are mustering the courage.

©2018 Bloomberg L.P.

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