A PIMCO portfolio mgr's comment on rates......
No need to get fancy here: A 10-year Treasury yield of 1.7% isn’t anyone’s idea of generous, but it is 2.3 percentage points more than what Europe is paying. The Federal Reserve won’t want to let that differential make the dollar too strong. Futures prices suggest the near-certainty of at least a quarter-point cut in the federal-funds rate in September, and better-than-even odds of two more cuts by year’s end.
Pimco, the giant West Coast bond manager, says negative U.S. Treasury yields are a possibility, if not a probability. It cites not only cooling growth but also longer lives, which are creating a glut of retirement savings.
Bank of America Merrill Lynch sees a risk of the 10-year yield dropping below 1% within a year. The record low is 1.37%, reached in 2016.
Below, a segment of Barrons Interview with TIS Group .....
What are you expecting from the Fed?
My expectation is that we’re going to be down to zero rates out to two years, primarily for funding reasons. Foreign buyers have basically stopped buying Treasuries for five years. They have been modest sellers. The primary dealers are stuffed with government-bond inventory. They need a new buyer. That is going to be the Fed. The budget deficit was $1.2 trillion last year, $1.3 trillion the year before, and will be at least $1.1 trillion next year. They have to fund it. Fed Gov. Lael Brainard
gave a speech in Richmond, Va., about buying Treasury debt out to one year and possibly to two years on the yield curve. The Fed will buy them all.