Bonds don’t have “a lot of value” as Federal Reserve policy drives negative real yields that help prop up equity markets, according to Dominic Konstam, global head of interest-rates research at Deutsche Bank AG.
Yields on 10-year Treasuries may climb above 2 percent by the end of the year, said Konstam of Deutsche Bank, one of 21 primary dealers that trade Treasuries with the Fed. That compares with a median estimate of 1.88 percent by 74 economists surveyed by Bloomberg. The yield fell to a record 1.38 percent on July 25.
“There’s not a lot of value in bond markets, unless you really think policy makers are going to get it wrong,” Konstam said in an interview on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene, Scarlet Fu and Sara Eisen. “We don’t think they will. We do have a call for higher yields around the turn of the year.”
Real yields refer to interest rates minus inflation. Consumer prices increased 1.7 percent in the 12 months ended in June, according to the Labor Department’s consumer price index. (SPX) For 10-year notes yielding 1.63 percent that implies a real yield of negative 0.07 percent.
The Standard & Poor’s 500 Index has returned 13 percent including reinvested dividends this year. Treasuries have gained 2.4 percent during that period, according to Bank of America Merrill Lynch index data. Speculation that the Fed may buy more securities, known as quantitative easing, to prevent deflation is helping support stocks, Konstam said.
“Equities and inflation expectations have been extremely correlated,” said Konstam, who is based in New York. “They’re doing exactly what you would expect them to be doing in a world where you think the Fed has been ultra-accommodative.”
The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE. The Federal Open Market Committee said on Aug. 1 it will pump fresh stimulus if necessary into the weakening economic expansion to boost growth and reduce an unemployment rate that’s been stuck at 8 percent or higher for more than three years.
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