Ex-BlackRock Manager Sees 4% U.S. Yield on Policy Tightening

(Bloomberg) -- A former bond manager at BlackRock Inc. says the yield on 10-year Treasuries may hit 4 percent by the end of this year, pitting him against many on Wall Street who expect a shallower sell-off in bonds.

“We are going back to the world as we knew it before the crisis,” said Stephen Miller, now an investment consultant for Grant Samuel Funds Management in Sydney.

Bond investors are underestimating the pace of monetary policy tightening needed at a time of broad global economic growth and a return of developed economy inflation to levels that will be much closer to central bank targets, said Miller, who spent 14 years at BlackRock, where he headed its fixed-income team in Australia. 

As markets adjust to that environment in a U.S. economy with robust corporate profits, the 10-year yield will rise to between 3.5 percent and 4 percent by the end of 2018 as central-bank stimulus is continually wound down, he said. Ten-year Treasuries traded with a yield of just under 2.9 percent on Thursday.

Federal Reserve chair Jerome Powell signaled this week that stronger growth could prompt policy makers to accelerate the pace of tightening this year, triggering losses in Treasuries. Fed funds futures contracts now price in close to three full rate increases this year, up from 2.8 hikes Monday.

As the U.S. economy exits the era of low rates and loose monetary policy, investors need to use a 2 percent nominal growth and 2 percent inflation level as their working assumption for investing, Miller said.

Equity investors need not worry, he added. While volatility will be higher than what investors have become accustomed to in recent years, the S&P 500 Index can still grind out mid-single digit returns this year even as the bond rout deepens.

“If bond yields are contained to that 3.5 to 4 percent range, I don’t see that presaging undue difficulty for equity returns,” he said. “It might be a little bit of a wild ride.”

Miller began work earlier this year at Grant Samuel, a boutique asset manager that has about A$6.5 billion ($5 billion) in funds under management. It’s owned by Canada’s CI Financial Corp. Everything he heard from Jerome Powell this week reinforced his view that the ramp up in bond yields will continue, Miller said.

“He’s thinking that we may need to tighten more than three times this year and if we need to do that, that’s not bad news,” Miller said. “That is a return to normality.”

©2018 Bloomberg L.P.

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