Bloomberg News

Economic Pace, U.S. Yields May Stay Low, RBS’s O’Donnell Says

June 20, 2011

June 20 (Bloomberg) -- The Federal Reserve may have understated the staying power of negative effects on U.S. economic growth, according to William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc.

“Economic growth, or this economic soft patch that we’re in right now, some of the factors that have growth so weak relative to expectations, may not be as transitory as the Fed has hoped,” said O’Donnell in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

The U.S. economy grew at an annual rate of 1.8 percent in the first quarter, less than the median 2.2 percent increase forecast by economists surveyed by Bloomberg News. Forecasts for the gross domestic product growth rate in the second quarter is 2.3 percent followed by 3.2 percent in the third quarter, according to the median estimate in separate surveys.

Second- and third-quarter GDP growth may also fall below forecasts, Stamford, Connecticut-based O’Donnell said.

Economists have reduced their second-quarter growth estimates to 2 percent or lower, even though in April the Fed said first-quarter weakness was caused by transitory factors such as weather, defense spending and disruptions in auto production, O’Donnell wrote to clients today.

“The expectations of 3 to 4 percent growth in the second half of this year, if they start to get dented or come down, I think the Treasury market could continue to rally,” he said.

O’Donnell said he suspended his forecast on the benchmark 10-year note because of uncertainty surrounding the European debt crisis. Yields may remain around the 3 percent level in the near term, he said.

Yields on the 10-year note rose three basis points, or 0.03 percentage point, to 2.97 percent in New York. The yield on the 10-year benchmark hit a 2011 low of 2.88 percent on June 16. Yields have been steadily declining since April 8 when they touched 3.61 percent.

-- With assistance from Ken Prewitt in New York. Editors: Paul Cox, Greg Storey

To contact the reporter on this story: Joe Ragazzo in New York at jragazzo@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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