The recent decline in Treasuries has gone too far and a small change in investor sentiment may spur a reversal, according to Michael Cloherty, at Royal Bank of Canada’s RBC Capital Markets.
U.S 10-year yields fell two basis points to 2.13 percent at 8:45 a.m. in London, according to Bloomberg Bond Trader data. The yield rose to 2.29 percent on June 11, the highest level since April 2012. A basis point is 0.01 percentage point.
Fed policy makers next gather on June 18-19 and Chairman Ben S. Bernanke is scheduled to hold a press conference after the meeting. The central bank is buying $85 billion of Treasury and mortgage debt a month, and has kept the target for overnight lending between banks at almost zero since December 2008. Bernanke said on May 22 the Fed could reduce purchases if the employment outlook shows sustainable improvement.
“The sell-off is a bit overstretched and that only needs to see a modest change in sentiment to get a correction,” Cloherty, the head of U.S. interest rate strategy at RBC Capital in New York, wrote in a note to clients yesterday. “The Fed’s communication strategy will shift to sending the message that tapering does not mean a rapid transition to higher Fed funds rates,” Cloherty wrote.
RBC Capital, one of 21 firms that trade directly with the Fed, said it expects the central bank to announce tapering in October. If tapering stops in April, policy makers are likely to raise the Fed funds rate in the third quarter of 2015, according to the report.
The 10-year yield will be 2.10 percent at the end of June, rising to 2.33 percent by year-end, according to median economist estimates in a Bloomberg News survey from June 7 to June 12.
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