Bloomberg News

Treasury 10-Year Yields May Drop Below 1%, BT Investment Says

October 11, 2011

Oct. 11 (Bloomberg) -- Yields on 10-year Treasury notes may drop to a record low on prospects sagging confidence and slowing economic growth will prompt the Federal Reserve to expand monetary stimulus, BT Investment Management Ltd. said.

Benchmark yields, which touched a record 1.6714 percent on Sept. 23, may fall below 1 percent over the next year, according to Vimal Gor, the Sydney-based head of income and fixed interest at BT Investment. Gor predicted last October that yields would go below 2 percent as the Fed expanded purchases of Treasuries. Policy makers said last month that the central bank would replace much of the short-term debt it holds with longer-term Treasuries in a bid to reduce borrowing costs, a move that has been dubbed Operation Twist by analysts.

“The Fed basically told us to be bullish Treasuries by doing Operation Twist,” Gor, who oversees the equivalent of $13 billion, said in an Oct. 7 interview. “With the next move down in confidence and as we get into proper recessionary mode in the developed world, we will see another leg down in yields.”

Ten-year yields increased six basis points, or 0.06 percentage point, to 2.13 percent as of 5:50 a.m. in London, according to Bloomberg Bond Trader prices. The 2.125 percent security due in August 2021 fell 1/2, or $5 per $1,000 face amount, to 99 29/32.

The weighted average of about 70 economists in a Bloomberg survey that gives a greater emphasis to recent estimates is for the 10-year yield to finish the year at 2.11 percent and be at 2.3 percent in the first quarter of 2012.

Below 1 Percent

Treasuries have returned 8.2 percent this year, including reinvested interest, poised for the biggest annual advance since 2008, Bank of America Merrill Lynch indexes show.

“You could make a very credible case for 10-year Treasury yields trading sub-1 percent in the coming year,” said Gor.

This year’s rally was bolstered as the Fed bought the debt through June in a second round of purchases, or so-called quantitative easing, announced in November last year.

The central bank said on Sept. 21 it will buy securities with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

The Fed failed to force investors out of safe assets by flooding the financial system with liquidity through its first two packages of quantitative easing, Gor said.

“So now they’ve gone the other route and they’re explicitly trying to get interest rates down,” he said. If unsuccessful, the central bank’s next move may be to introduce yield targets on bonds. “We think that’s a reasonable likelihood sometime in the next 12 months,” Gor said.

The Fed has an “implicit target” for 10-year yields of 1.5 percent or less, Dominic Konstam, the global head of rates research at Deutsche Bank AG in New York, wrote in a report sent via e-mail last week. Deutsche Bank is one of the 22 primary dealers authorized to trade directly with the Fed.

--Editors: Benjamin Purvis, Jonathan Annells

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Sarah McDonald in Sydney at smcdonald23@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net


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