Tags: blackrock | watt | yield | treasury

BlackRock Institute's Watt: Fed Will Keep Cap on Yields

Monday, 02 April 2012 04:02 PM

Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, said Treasury yields won’t rise sharply this year with the Federal Reserve buying debt and maintaining an expanded balance sheet.

“We don’t think that there’s going to be a big blowout in terms of yields going to a three-handle plus,” referring to a rise to 3 percent or greater on the 10-year Treasury note, Cameron Watt said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. There are “buyers lying in wait in this financial repression. Equally, all of us know that the Fed has been pretty responsible for all of the action so far this year.”

The 30-year bond yield, at 3.35 percent Monday, would likely be about 0.7 percentage point higher if not for the Fed’s purchases of long-term debt as part of a plan to keep borrowing costs low, he said. The central bank is replacing $400 billion of shorter-term Treasuries in its holdings with longer-term debt under the program that has become known as Operation Twist, which is due to end in June.

Treasuries rose earlier Monday as the Fed bought $4.5 billion of notes in the first of four rounds of purchases over three days that equals the most by the central bank since December. Yields on 10-year notes fell as much as five basis points before trading little changed at 2.19 percent at late afternoon New York time, according to Bloomberg Bond Trader prices.

Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock, wrote in a March 28 report that yields on 10-year notes may rise to as high as 3 percent by the end the year in what may be the end of the three-decade rally in bonds. New York-based BlackRock Inc. is the world’s biggest money manager, with about $3.5 trillion of assets.

Primary Dealers

Cameron Watt leads the institute’s events and debates that bring together BlackRock’s investment leaders and chairs the central strategy group. He joined BlackRock in 1985.

After rising to as high as 2.40 percent last month from 1.88 percent at the end of 2011, the yield on the benchmark 10-year note will finish 2012 at 2.49 percent, according to the average estimate in a Bloomberg News survey of the 21 primary dealers that trade with the Fed. That’s the same as a January poll, suggesting the market isn’t ready to declare a bear market in bonds after a 30-year bull run.

Signs of strength in the economy caused a 5.56 percent loss in bonds maturing in 10 years or more last quarter. With inflation in check, Fed Chairman Ben S. Bernanke said last week that the central bank will consider further stimulus, even after upgrading its economic outlook March 13.

‘Price-keeping Operation’

Financial repression is when “you buy securities at a price that you wouldn’t otherwise do so,” said Cameron Watt in the interview. The Fed’s purchases are “a price-keeping operation. The problem is that if individual investors start to think that a Treasury bond -- as opposed to a bill -- is a money market fund with a yield,” said Cameron Watt, who predicted the 10-year Treasury yield would end the year in the 2.6 percent to 2.8 percent range.

“That’s quite a lot of loss on something that is supposed to be low on volatility and high on security,” London-based Cameron Watt said.

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Monday, 02 April 2012 04:02 PM
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