European sell-off clouds Fed outlook in Treasuries
INVESTORS may not want to read too much into last week’s surge in Treasury yields as to whether it means the Federal Reserve is closer to raising interest rates.
That’s the advice of Gustavo Reis, a global economist at Bank of America Merrill Lynch in New York. Most of the advance in yields can be linked to a government-debt sell-off in Europe rather than a shift in perception on the timing of Fed policy.
Between 70% and 90% of the increase in yields since April 15 was the result of global factors, according to an analysis by the unit of Bank of America Corp. To get that figure, Mr. Reis’s group used a methodology from the International Monetary Fund’s ( IMF) July 29 report on the “spillover effect” between global rates markets.
“It’s a couple of exceptional factors, not a reassessment of the outlook” for the Fed, Mr. Reis said in a telephone interview on Thursday. “We see clear signs that volatility is spilling over from bunds into Treasuries.”
The yield on the 10-year US Treasury note has climbed 25 basis points, or 0.25 percentage points, since April 17. It was trading at 2.12% at 12: 54 p. m. New York time on Saturday. At the same time, yields on eurodollar futures contracts, often seen as a gauge of Fed expectations, indicate that traders don’t expect substantially higher short-term interest rates by September than they did weeks ago.
RATE OUTLOOK
While bond bulls shouldn’t worry for now about the Fed, investors trying to figure out the next move in Treasuries should still watch what’s happening overseas, Mr. Reis said.
Global yields’ current levels are sustainable, and there’s room
for Treasuries to fall further, he said. The European Central Bank’s (ECB) bondbuying program will continue to lend some support to Treasury prices. Bank of America forecasts the yield on the 10year note will rise to 2.35 % by yearend.
“You could see some move higher,” he said, but “we’re not concerned about a significant spike.”
The long-term effect of international factors on Treasuries has been positive, the analysis found. Since August, the ECB has contributed about 10 basis points to the roughly 40-basis-point drop in the 10-year yield, according to an April 30 note to clients. —