Goldman Sachs Asset Management predicts Treasury 10-year yields may climb to the highest level in four years as the Federal Reserve ends its bond-buying program and weighs the first interest-rate increase since 2006.
The 10-year yield may rise as high as 4 percent over 12 months, the most since April 2010, as the end of so-called quantitative easing adds more interest-rate risk to the market, said Philip Moffitt, the Sydney-based head of fixed income in Asia-Pacific at Goldman Sachs Asset, which has $935 billion in assets under management globally. The yield closed at 2.56 percent yesterday and touched 2.65 percent on Sept. 19, the highest since July 7.
The Fed is on course to end its bond purchase program next month after tapering monthly buying to $15 billion on Sept. 17 in a seventh consecutive cut. While declining to specify how soon after the federal funds rate will rise, Chair Janet Yellen said policy makers will first increase the benchmark and then cease reinvesting maturing debt from its record $4.45 trillion balance sheet, reducing holdings in a "gradual and predictable manner."
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"Once the Fed stops buying and reinvesting in Treasuries you get quantitative tightening," Moffitt said on Sept. 19 in an e-mailed response to questions. "The impact will begin as soon as tapering ends, and reinvesting coupons alone will not be enough to offset the rolldown of stock."
Yellen said policy makers are in no hurry to shrink a balance sheet that's ballooned after more than $3 trillion of debt purchases in the past six years as the Fed sought to cap long-term rates. Letting holdings run off to levels that the central bank would consider normal "could take to the end of the decade," she said in a Sept. 17 press conference after a meeting of the Federal Open Market Committee.
There's about a 77 percent chance the U.S. central bank will raise its target for overnight lending between banks by the September 2015 meeting, futures data compiled by Bloomberg showed yesterday. The target rate has been in a range of zero to 0.25 percent since 2008 to support the economy.
The 10-year yield will probably be in a range of 3.5 percent to 4 percent over 12 months, Moffitt said. Analysts forecast it will climb to 3.28 percent by the third quarter of 2015, based on a Bloomberg survey of banks and securities companies, with the most recent predictions given the heaviest weightings.
"The very fact that the Fed is doing nothing adds duration risk to the market, and that's why we are bearish on Treasuries," Moffitt said.
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