(Bloomberg) - Bank of America rates strategists abandoned their recommendation to be tactically long 10-year Treasury notes, seeing risk that US economic resilience could drive the yield to 4.75%.
While they continue to expect 10-year Treasury yields — which reached a multiyear high last month — will end the year around 4%, that forecast is at risk, strategists led by Mark Cabana wrote in a note.
Having “long recommended clients remain underweight the US front end and trade the back end tactically from the long side,” the BofA group now recommends a neutral stance on the 10-year. With economic and financial data suggesting Federal Reserve policy isn’t yet sufficiently restrictive, they see risk that the 10-year rate “might settle into a higher trading range.” It was near 4.25% Friday.
The path of least resistance for higher rates comes also from a “daunting” Treasury supply and demand balance and investor positioning, they said.
The benchmark for global markets and a key driver of homeowner and corporate borrowing, the 10-year yield has been above the 4% threshold for the longest period during the current Fed rate hike cycle. A recent peak of 4.36% was its highest level since 2007, and the selloff leaves the main Bloomberg Treasury index in negative territory for the year.
‘Closer to 4.75%’
Signs of a slowing labor market and inflation mean yields “are near the top of the range for the 10-year in this cycle,” and therefore it would be a surprise “to see 10-year rates much above 4.75% if the Fed is nearing the end of the hiking cycle and markets continue to price cuts into 2024-25,” the strategists wrote.
A “risk scenario with much higher rates would likely require a re-acceleration of inflation, which looks unlikely in the next six months,” though there’s precedent for it from the 1970s.
By Michael Mackenzie
