Bond Bears Renewing Attack on 3% May Find Ammo in Jobs Report

(Bloomberg) -- Treasuries are back in selloff mode and some investors who remained bearish even in the face of trade-war angst and tumbling stocks say Friday’s U.S. jobs report may propel yields higher still.

BlackRock Inc., Loomis Sayles & Co. and BlueBay Asset Management LLP are among money managers that have stuck to calls for higher yields. Predictions for the benchmark 10-year yield to renew its assault on 3 percent are mostly underpinned by confidence that U.S. growth and the Federal Reserve’s policy normalization plans won’t be derailed, although some investors warn that protectionist rhetoric could still trigger big temporary swings.

“The reality is that the data remains sufficiently strong even with all the noise surrounding trade and everything else,” said Charles Diebel, a money manager at Aviva Investors. “The consensus remains for higher yields.”

Bond Bears Renewing Attack on 3% May Find Ammo in Jobs Report

The U.S. employment report for March could provide some impetus for that. Median analyst estimates ahead of the release indicate an expectation that payrolls growth will slow to a still-solid 185,000, while the unemployment rate is seen ticking down to a 17-year low of 4 percent. Monthly growth in average hourly earnings, which many traders see as pivotal to the Fed’s outlook on inflation, is expected to accelerate to 0.3 percent.

Looking Bearish

The outlook may be for continued pressure on Treasuries irrespective of whether the market rises or retreats in the immediate aftermath of the non-farm payrolls report, if the results of a survey by BMO Capital Markets strategists are any guide. The team of Ian Lyngen and Aaron Kohli has been among the most bullish this year, saying that 10-year Treasury yields may have already peaked in 2018. Yet this survey, they said, was “in a word -- BEARISH.”

“Regardless of whether the market trades higher or lower in the wake of NFP, we had above-average interest in selling,” they wrote in a note Thursday.

The 10-year U.S. yield this week dropped below 2.72 percent for the first time since early February before rebounding as tariff concerns eased and investors regained some of their appetite for risk. It reached 2.83 percent Thursday, still below the four-year high it touched in February.

The reversal is another setback for persistent bond bulls, who have so far endured a painful year. Treasuries lost 1.2 percent in the first quarter, their worst performance since the final three months of 2016, based on the Bloomberg Barclays U.S. Treasury index.

Above 3%?

Elaine Stokes, a portfolio manager at Loomis Sayles, says that with Fed officials indicating an additional two rate hikes in 2018, the 10-year yield could easily move to 3.25 percent by the end of the year.

“That’s not that big of a move,” she said. “That said, between now and then we could have a 20 to 50 basis point move in any direction. ”

BlackRock’s Rick Rieder said this week he also sees 3.25 percent by year’s end, while BlueBay’s Mark Dowding says a test of 3.5 percent is possible.

Gemma Wright-Casparius, a senior money manager at Vanguard Group Inc., says 10-year yields may reach about 3 percent this year given Fed policy adjustments and economic growth. But that’s likely to be the peak, she said, with structural forces including technology, demographics and globalization set to keep inflation in check.

“Our medium-to-long-run probability is that inflation stays right around the Fed’s target, and so we don’t really expect any big upward tilt in inflation or big upward tilt in interest rates,” she said. “That doesn’t mean to say tactically rates can’t go a little higher from current levels.”

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