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May 10, 2017 at 05:32 AM
(Bloomberg) — The 10-year Treasury yield may climb to 2.75% to 3% over the “medium term’’ as the Federal Reserve will probably raise rates twice more this year, according to Pacific Investment Management Co.
(Related: Pimco Liquidates Arnott-Run Smart Beta Fund)
The likelihood of a reduction in the Fed’s balance sheet over the next couple of years will also bolster yields, said Mark Kiesel, Pimco’s chief investment officer for global credit. President Donald Trump’s proposed tax cuts means the market will have to build in higher inflation risk and term premium for more debt issuance in the future, he added.
“The trend towards modestly higher rates is intact,” Kiesel said in a Bloomberg Television interview with Betty Liu and Yvonne Man. “After the Fed raises one or two more times, the market has to price in the taper.”
The U.S. 10-year yield more than doubled from an all-time low in July to reach 2.64% in December, before retreating to 2.16% last month as confidence in the Trump reflation trade waned. It was around 2.39% Tuesday in New York.
The Fed kept rates on hold last week, making it clear it wasn’t discouraged by weak first-quarter growth, which it described as “transitory,” and noting the labor market had strengthened while inflation was seen rising to the 2% target.
