Are We There Yet? Treasury Yields May Drive Lower

 

By Bondsquawk

July 19,2012

Barclay’s Global Macro Daily by Anshul Pradhan and Vivek Shukla, expected treasury yields to fall even further from its low.

We expect 10y yields to decline to 1.25% over the coming months.

One of the most important factor for such a prediction is dim future world growth projection. United States has been growing below-expectations and even Europe has started to not perform as previously viewed.

In the US, Q1 12 real GDP growth was 1.9%, vs. initial consensus estimates of 2.5%, and Q2 istracking just 1.4%, compared with initial consensus estimates of 2.3%.While the core of Europe seemed resistant to the peripheral slowdown a few quarters ago, growth numbers have now started to disappoint, and expectations are being revised lower.

Another important reason is the lack of improvement from the fiscal front. There is increased uncertainty about tax-cuts and other fiscal policies just before the presidential elections this year and would likely lead to higher demand for ‘safe havens’.

Without policy action this year, the fiscal drag in 2013 related to the Bush-era tax cuts, sequestration and payroll tax cuts/LT unemployment benefits could amount to as much as 4% of GDP.

In addition to the above two causes, tighter bank capital regulation is likely to cause downward pressure on the yields. The stringent regulations implemented to reduce the risk of another financial crisis will curb credit growth. This would lead to even more demand for safe assets.

Over the past six months, loan portfolios of domestic commercial banks have grown just 2.3% in annual terms, down from 3.6% in the second half of 2011. These levels remain a far cry from the pre-crisis pace.

Moving forward, there is a strong possibility that the Fed will act to boost growth in the country and thus in the process will lead to an increased demand for government bonds.

In his latest testimony to the Senate, Fed Chairman Bernanke sounded fairly dovish in his economic assessment and highlighted that the Fed stands ready to act if needed. Unless there is a quick reversal towards a better economic outlook, the Fed is likely to take further steps, which should drive US rates even lower.

Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

 
 
 

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