(Bloomberg) — Bank of America rate strategists have modestly dropped their recommendation for 10-year Treasury notes on concerns that U.S. economic resilience could push the yield to 4.75 percent.
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Even if 10-year Treasury yields continue to rise — which hit a multi-year high last month — they will end the year at around 4%, the forecast is at risk, strategists led by Mark Cabana wrote in a note.
BofA Group now recommends a neutral position on the 10-year as “recommended clients trade the back end tactically long with the U.S. front-end underweight.” Economic and financial data suggest that Federal Reserve policy is not yet sufficiently restrictive, with concerns that the 10-year rate “could move into higher trading territory.” It was around 4.25% on Friday.
The path to less resistance to higher rates will come from a “terrible” Treasury supply and demand balance and investor positions, he said.
A benchmark for global markets and a key driver of homeowner and corporate credit, the 10-year yield has remained above the 4% threshold during the current Fed rate hike cycle. It was the highest level of 4.36% since 2007, and the selloff leaves the main Bloomberg Treasury Index in negative territory for the year.
Close to 4.75%
Signs of a labor market slowdown and inflation mean output is “near the 10-year peak in this cycle” and therefore “it would be surprising to see the 10-year rate above 4.75%.” As the pedestrian cycle nears its end and markets continue to bear down on prices through 2024-25,” the strategists wrote.
Despite what was seen before the 1970s, “the threat of very high inflation may call for a re-acceleration of inflation in the next six months, which seems unlikely.”
Read more: Barclays sees scant rally for Treasuries despite prices
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