Getty Images/iStockphoto
Less than three weeks into the new year, two of Wall Street's biggest bond dealers are already dialling back the 2016 U.S. Treasury yield calls they made at the end of 2015.
JPMorgan Chase & Co. and Deutsche Bank AG reduced forecasts for 10-year yields at the end of last week, wagering the U.S. Federal Reserve won't raise interest rates as many times as policy-makers expect. The banks, among the 22 primary dealers that trade with the Fed, say pressures will build amid the depreciation of China's currency, slowing global economic growth, investor flight from risky assets and a dimming inflation outlook.
Deutsche Bank predicts the 10-year yield will end the year at 1.75 per cent, down from the 2.25-per-cent call it made in December, while JPMorgan says 10-year notes will yield 2.45 per cent at year-end, down from a previous forecast of 2.75 per cent.
Treasuries have defied bearish calls since the Fed began removing unprecedented monetary policy accommodation enacted to combat the financial crisis. Following the Fed's move to raise interest rates last month for the first time since 2006, the consensus forecast is for 10-year yields to climb, ending this year at 2.75 per cent. Instead, yields dropped to three-month lows last week as investors sought refuge from a global stock-market rout and as plunging oil prices suppressed the inflation outlook.
"The themes which have driven Treasury yields decisively lower early in 2016 are unlikely to dissipate quickly," JPMorgan strategists including Jay Barry wrote in a report published
Jan. 15. The New York-based bank expects the Fed to raise rates three times this year, down from a previous estimate of four. Policy-makers expect to boost rates four times in 2016.
The benchmark 10-year Treasury note yielded 2.03 per cent Tuesday afternoon, according to Bloomberg Bond Trader data. The price on the 2.25-per-cent security due in November, 2025, rose about 1/32nd, or 31 cents (U.S.) per $1,000 face amount to 101 15/16th. Treasuries erased losses as U.S. stock indexes reversed gains.
Yields touched 1.98 per cent on Jan. 15, the lowest since October. They're down from 2.3 per cent on Dec. 16, when the Fed raised its benchmark from near zero.
Deutsche Bank, based in Frankfurt, also cited the strong U.S. dollar and weak commodities, stemming from slowing demand from China, as a challenge to the Fed.
China is "symptomatic of weak global demand and the underlying risk of truly divergent monetary policy in the U.S.," Deutsche Bank strategists led by Dominic Konstam wrote in a note dated Jan. 15. The Fed may "skip March and signal a pause, or hike at the March meeting and signal a longer pause."
Futures traders assign about a 32-per-cent chance that the Fed will boost borrowing costs in March, based on the assumption that the effective Fed funds rate will trade at the middle of the new target range after the next increase. That implied probability rose as high as 53 per cent on Dec. 30.