Treasury Yield at 3% May Mark End of Rout, or Just the Beginning

(Bloomberg) -- The 10-year Treasury yield appears destined to test 3 percent, Wall Street’s best and brightest agree. Whether it will continue its ascent from there is another story.

The biggest January wage gain in more than a decade is adding to bearish speculation as U.S. inflation expectations climb, cementing confidence that the Federal Reserve is on course to raise interest rates at least three times in 2018, if not more. Yields on the 10-year note surged as much as 6 basis points Friday to 2.85 percent, bringing this year’s run up to almost half a percentage point.

Yet while many of the market’s elite have warned that a 3 percent 10-year will herald the arrival of a so-called bond bear market, others say a sustained move higher from there isn’t a guarantee -- especially as stocks falter. As rates rise, equity investors concerned about inflated valuations may rotate into fixed-income assets and boost demand for Treasuries.

“You have to watch the 3 percent level,” said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. “There is a magnetic force there to some extent that will pull the yield to test that. But we have supply next week and we need to see if buyers come in.”

The Treasury is set to auction $66 billion of 3-, 10- and 30-year securities next week.

Nonfarm payrolls rose 200,000 in January, exceeding the median estimate of economists for a 180,000 increase, as the jobless rate held at a near 17-year low of 4.1 percent, data showed Friday. Average hourly earnings rose 2.9 percent from a year earlier, the most since June 2009.

“We’ve been in the three Fed hikes per year camp, and that looks more likely and could even be more,” said Scott Mather, chief investment officer for core strategies at Pacific Investment Management Co. “It’s difficult for us to see 10-year yields above 3 percent. We are just fast forwarding what we thought for a selloff over the course of the year and packing it into the first quarter.”

The outlook for annual consumer price growth over the next 10 years as measured by Treasury Inflation Protected Securities climbed to 2.14 percent Friday, touching the highest since September 2014. The breakeven rate on 10-year TIPS averaged 1.88 percent in 2017.

Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments, which manages $494 billion in assets, agreed that the the backup in yields is getting toward a potential stalling point.

“Terminal velocity of this current move is at 3.25 percent,” said Tannuzzo. “If nothing else stops it, that’s where you’ll naturally settle in.”

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Boris Korby

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