Pacific Investment Management Co. says benchmark Treasury yields will increase this year as inflation accelerates and the Federal Reserve raises interest rates.
U.S. 10-year yields will climb to a range of 2% to 2.5%, PIMCO manager Mark Kiesel wrote in an e-mail, from 1.94% Tuesday. Investors are adding to bets for the Fed to move in 2016, as a gauge of inflation expectations for the coming 12 months rose to the highest in almost a year. Policymakers will keep their benchmark unchanged at a two-day meeting that starts Tuesday, according to a Bloomberg survey of economists.
“We see one to two rate hikes this year for the Fed, whereas the market is only expecting one,” wrote Mr. Kiesel, who is based in Newport Beach, Calif., and is one of the three managers for the $87.8 billion Total Return Fund. “If rates were to head towards 2.5%, we would be looking to add at that level.”
The yield on benchmark 10-year Treasuries fell two basis points, or 0.02 percentage point, as of 9:35 a.m. in London, according to Bloomberg Bond Trader data. The 1.625% note due in February 2026 rose 7/32, or $2.19 per $1,000 face amount to 97 6/32. Ten-year yields climbed to 1.98% Monday, reaching the highest since January.
The Total Return Fund is little changed over the past year, underperforming 68% of its peers, according to data compiled by Bloomberg.
The probability the Fed will raise rates this year jumped to 78%, the highest level in two months, futures contracts indicate as the world's largest economy shows signs of improvement. The U.S. gained more jobs in February than analysts predicted, while a factory slump showed signs of easing, based on reports published this month. Inflation will probably approach the Fed's 2% target in 2016, Mr. Kiesel wrote. Data Tuesday will include retail sales, producer prices and New York state manufacturing.
The difference between yields on one-year debt and similar-maturity Treasury inflation-protected securities, a gauge of trader expectations for consumer prices over the life of the debt, was 172 basis points. The figure climbed to 179 on Monday, the highest level since April 2015.
Policymakers will be able to use this week's meetings to update their outlook for rates, after indicating in December they would make four quarter-point increases in 2016. Only five of the 72 economists surveyed by Bloomberg predict the central bank will move that far.
Morgan Stanley said in a report March 13 the Fed will probably increase its benchmark once this year, in December. Treasury 10-year yields will fall to 1.45% by the end of September, according to the firm, which is one of the 22 primary dealers that trade directly with the central bank.
The Fed will probably wait until wages start to pick up before raising rates again, said Hans Goetti, the chief strategist for the Middle East and Asia at Banque Internationale à Luxembourg, which has $36.4 billion under management.
Policymakers will also want to avoid acting toward the end of the year as the Nov. 8 U.S. presidential election approaches, he said, speaking in an interview in Singapore.
“The Fed needs to see wage inflation, which we saw from the last payrolls report was non-existent,” Mr. Goetti said. “If there's no rate hike in June, there won't be one at all this year.” The February jobs report showed a 0.1% decline in average hourly wages.
Ten-year yields will probably be in a range of 1.6% to 2% this year, holding their appeal as a haven asset, he said.
The consensus forecast among economists surveyed by Bloomberg is for yields to rise. The 10-year will be 2.33% by Dec. 31, based on the responses, with the most recent forecasts given the heaviest weightings.