The biggest Treasury market two-month gain in a year is about to give way to a selloff, based on Bloomberg surveys of economists.
Benchmark 10-year yields will climb to 1.84 percent by March 31 from 1.75 percent Tuesday, the Bloomberg surveys show, with the most recent forecasts given the heaviest weightings.
Stocks and oil prices are showing signs of stabilizing after a rout earlier this year drove investors to the relative safety of U.S. debt. The Labor Department’s monthly employment report March 4 will show U.S. hiring increased, based on responses from economists, while the Federal Reserve’s preferred inflation gauge jumped in January.
“People will realize that there’s inflation pressure in the U.S.,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest lender. “It’s not a good idea to rush into Treasuries.”
U.S. government securities have returned 3 percent in the first two months of this year, their biggest back-to-back gain since January 2015, according to the Bloomberg World Bond Indexes.
Treasuries declined Tuesday even as a Chinese manufacturing gauge fell short of the level economists expected. The benchmark 10-year note yield rose one basis point, or 0.01 percentage point, as of 7:03 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was 98 29/32.
The U.S. economy gained 195,000 jobs in February, on top of 151,000 for January, according to the Bloomberg surveys. The Fed’s preferred inflation gauge rose 1.3 percent in January, the government reported last week. It was the highest level in more than a year, while holding below the central bank’s target of 2 percent. An industry report Tuesday will show manufacturing contracted for a fifth month, based on the surveys.
Not everyone agrees with the economists’ forecasts.
“I don’t see how Treasury yields can move meaningfully higher,” said Barra Sheridan, a rates trader at Bank of Montreal in London. With the Bank of Japan cutting rates to negative, the European Central Bank “talking about doing more” and “no chance of rate hikes any time soon” from the Bank of England, “as much as the Fed may want to get rates higher, it will be very difficult to decouple” from other central banks, he said.
Treasuries still have a lot of things going for them.
The 10-year yields offer value compared to 0.13 percent in Germany and negative 0.07 percent in Japan, said Yusuke Ito, a senior investor at Mizuho Asset Management, which handles about $44.4 billion. “It’s getting more and more attractive in a relative sense,” he said.
Fed Bank of New York President William C. Dudley said that while he expects inflation to reach the U.S. central bank’s target over time, he’s lost some confidence in that prediction following recent turbulence in financial markets. The comments were contained in remarks prepared for a speech Tuesday in the Chinese city of Hangzhou.
“Partly, this reflects my assessment that uncertainty to the outlook has increased and that downside risks have crept up,” the vice chairman of the Fed’s policy committee said.
The consensus surveys proved wrong in 2015 and 2014, overestimating the potential for yields to rise both times.
While SMBC Nikko’s Shimazu has cut his 10-year yield forecasts to 2.75 percent by March 31 from 3 percent earlier in the year, he’s still sticking to his call for the figure to jump.