The 10-year Treasury bond yield will climb to a nine-year high of 5.5 percent by year-end, according to Morgan Stanley.
The budget deficit, which totaled $1.42 trillion last year and may rise even further this year, will cause the move, Morgan Stanley analysts say. The 10-year yield recently hit a nine-month high of 4 percent and recently was at 3.75 percent.
The budget gap forces the Treasury to issue massive amounts of bonds. Estimates for the Treasury’s bond issuance this year total $2.4 trillion.
And that supply will push bond prices lower and yields higher Jim Caron, Morgan Stanley’s head of bond strategy, told The Wall Street Journal.
"We've never seen this much Treasury supply in the history of the bond market."
But Goldman Sachs sees it differently. Its chief U.S. economist Jan Hatzius predicts the 10-year yield will slip back to 3.25 percent this year.
"Ultimately, we don't find supply to be of such great predictive power regarding what happens to interest rates," Hatzius told The Journal.
His thinking it that record government borrowing is merely a substitute for private borrowing, which is sluggish.
The economy is weak enough to keep inflation from surging, which also will keep interest rates from surging, Goldman maintains.
BlackRock, the world’s biggest money manager, sides with Goldman.
“We’re more comfortable owning longer Treasuries,” BlackRock managing director Stuart Spodek told Bloomberg. “There isn’t inflation in the pipeline.” He’s also attracted by the steep yield curve.
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