Treasury investors in benchmark 10-year notes will lose about 2 percent in 2016 as the Federal Reserve raises interest rates, economists’ projections indicate.
The yield will climb to 2.80 percent from 2.24 percent Monday, based on a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The estimated loss takes into account expected interest payments. Treasuries eked out a 0.9 percent gain in 2015, based on Bloomberg World Bond Indexes.
“The market might be pricing yields a little bit too low this early in the year,” said John Gorman, head of dollar debt trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “The economy’s going to do a little bit better than expected” in 2016, he said. Ten-year yields will be 3 percent to 3.25 percent by year-end, he said.
The benchmark declined three basis points as of 6:55 a.m. in London, based on Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 climbed 9/32, or $2.81 per $1,000 face amount, to 100 1/8.
Mideast, China
Treasuries fell early in Asian trading Monday as tensions between Iran and Saudi Arabia sent crude oil higher, raising speculation increasing fuel costs will cause inflation to accelerate. The market rallied back as Chinese stocks tumbled after an industry report showed manufacturing contracted for a 10th month.
Fed projections the central bank issued last month indicate policy makers will raise the benchmark in four quarter-point steps in 2016, after increasing it in December for the first time in almost a decade.
Toshifumi Sugimoto, chief investment officer at Tokyo-based Capital Asset Management, who has 30 years of experience trading bonds, said the U.S. economy won’t be strong enough to justify that many increases. A low inflation rate, struggling equities and demand for safety will all support Treasuries, he said.
U.S. inflation was near zero throughout 2015. Investors in the MSCI All Country World Index of stocks lost 1.8 percent last year, including reinvested dividends. Saudi Arabia on Sunday cut ties with Iran, driving demand for the most secure assets.
“I don’t think yields will go higher,” Sugimoto said. “The market believes the Fed is going to do four rate hikes. I think it’ll be one more time, and that’s all.” He plans to buy Treasuries if 10-year yields climb to about 2.4 percent or 2.5 percent, he said.
Sugimoto is in the minority. The steepest declines in the Treasury market this year will be in 30-year bonds, based on the surveys of economists. The yield will climb to 3.46 percent from 3.0 percent now, resulting in a 5.6 percent loss, data compiled by Bloomberg show.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Jonathan Annells, Tomoko Yamazaki
