FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields last year, said slowing U.S. economic growth will push 10-year yields down from the four-month highs reached this week.
Yields on 10-year notes climbed to 2.36 percent today, the highest since Oct. 28, as traders bet growth will accelerate after the Federal Reserve raised its assessment of the economy on March 13. Yields, which ended last year at 1.88 percent, will finish 2012 at 2.1 percent, Low said in an interview today.
“We actually expected interest rates would rise in the first and second quarter of this year,” said Low, who was the only one among 70 analysts in a Bloomberg survey who predicted the yield would fall to 2 percent by the end of last year. “People tend to start hiring more in the spring time, oil prices are high and there would be some inflation fears. We figured the employment data would probably stay strong up until May. After that, I don’t think it can be sustained.”
Improvement in the labor market isn’t sustainable at current levels, business investment is slowing rapidly and foreign demand for exports will decline, said Low, who is based in New York.
Employers in the U.S. boosted payrolls more than forecast in February and the jobless rate held at 8.3 percent. The 227,000 increase in payrolls followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed March 9. Job growth over the last six months was the strongest since 2006.
“We expect interest rates to fall in the second half of this year,” Low said. While yields may climb to 2.5 percent over the next few months, they will trade primarily within a range of 1.8 percent to 2.3 percent, he said.
Low expects the Fed will embark upon a third round of asset purchases, or quantitative easing, of $750 billion to $1 trillion by the third quarter and will focus on mortgage-backed securities.
“The market has taken it off the table although the Fed hasn’t,” Low said, pointing to the March 13 Fed statement reiterating that “the Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
“If job growth slows, then the market will anticipate a third round of QE, then yields will move down,” Low said. “QE is out of the question until the inflation situation quiets down. The only inflation pressure in the CPI today is gasoline prices. Once gas prices stabilize, the inflation threat is gone.”
The consumer-price index climbed 0.4 percent in February, matching the median forecast of economists surveyed by Bloomberg News, after increasing 0.2 percent the prior month, the Labor Department said today. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.1 percent, less than the 0.2 percent projected.
Low forecasts U.S. gross domestic product growth of 2 percent for 2012, compared with 2.2 percent in a survey of economists by Bloomberg News. A separate survey showed GDP of the Group of 10 nations will drop to 1.15 percent this year, from 1.31 percent in 2011.
“Global GDP is slowing, and because of that, we expect exports to slow,” Low said. “Congress is spending a little less than they did a year ago, which means less stimulus than what we had. When you look at that as a contribution to GDP, it’s negative. That’s one of the reasons the Fed is committed to monetary stimulus if they can.”
“The European crisis will return to the front page,” Low said. “U.S. investors are going to have to start looking at Europe again in the next four to five months. The same funding issues in the banking system will re-emerge. Their banking system is significantly more fragile than ours.”
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