With Federal Reserve Chair Janet Yellen poised to raise interest rates in 2015 for the first time in almost a decade, prognosticators are convinced Treasury yields have nowhere to go except up.
Their calls for higher yields next year are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg.
Getting it right hasn’t been easy. Almost everyone who foresaw a selloff this year as the Fed ended its bond buying was caught off-guard as lackluster U.S. wage growth and turmoil in emerging markets propelled Treasuries to the biggest returns since 2011. Now, even as the bond market’s inflation outlook tumbles, forecasters are sticking to the view that Treasuries are a losing proposition as the economy strengthens.
“Next year should be the break-out year finally,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said by phone from New York on Dec. 23. “The market is ignoring the rhetoric that Yellen and the FOMC is getting closer and closer to tightening. The market has it wrong.”
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Rupkey, who is among the 74 economists and strategists surveyed by Bloomberg this month, has one of the highest projections. He said he expects 10-year yields to rise to 3.4 percent by the end of 2015 from 2.20 percent at 10:57 a.m. in New York.
Back in January, Rupkey said yields would be 3.6 percent by now. Yields fell today with German peers as Greek Prime Minister Antonis Samaras failed in his final attempt to get his candidate for president confirmed.
The median forecast calls for yields to reach 3.01 percent during the same span. The roughly 0.75 percentage point increase would be almost twice as much as forecasters anticipated for 2014.
Combined with projections for yields on the two-year note to more than double to 1.53 percent and those on the 30-year bond to rise 0.89 percentage point to 3.70 percent, the prognosticators are more bearish than any time since heading into 2009.
That’s when they predicted yields on every debt maturity would rise more than a percentage point as the U.S., helped by the Fed’s easy-money policies, started to recover from its worst economic crisis since the Great Depression. Treasuries lost 3.7 percent that year in the biggest slide dating back to 1978.
After misreading the direction of the U.S. bond market this year as yields fell and Treasuries rallied 5.7 percent, a growing number of financial professionals are showing renewed confidence Treasuries are due for a selloff.
Given the chance to speculate on declines in only one asset, 20 percent of investors, traders and analysts in a Bloomberg Global Poll conducted last month picked government bonds as their top choice — the most of any category.
One of the biggest reasons is the strength of the world’s largest economy. U.S. gross domestic product expanded at a 5 percent annual rate in the third quarter, the most since the same period in 2003, revised government data released last week showed. Unemployment is at a more-than-six-year low of 5.8 percent.