US interest rates may head higher from here.
Steven Major, a London-based strategist with HSBC, says the yield on the benchmark 10-year US Treasury note has bottomed for the year.
In a note Thursday, Major wrote:
“The 10-year Treasury’s yield returned to 2.2%, roughly its year-end level, after falling to 1.64% on geopolitical concerns. This will likely be the low yield for the year. The bond market should shift its focus to the FOMC outlook and ECB bond buying now. The 10-year yield is likely to hold in a range around our forecast, with moves driven by concerns on slow growth and low inflation on the one hand and expected Fed tightening on the other.”
When the rest of Wall Street was making this precise forecast (that yields would rise) last year, Major was one of the very few who disagreed. Many investors expected the Federal Reserve to end quantitative easing and possibly hike rates sometime in 2014, so they forecast that yields would rise. Yields plunged instead.
The 10-year yield touched its year-to-date low on February 1, nearly a month after Major forecast in January that it could fall to as low as 1.5%. In the note Thursday, Major maintained his 2.5% year-end forecast.
On Thursday, the 10-year yield was lower at 2.08%. The 10-year yield is seen as the guide for nearly all other interest rates.
The strengthening jobs market is raising bets that the Federal Reserve will raise interest rates sooner than later. Rising rates make existing bonds less attractive, and that tends to cause a selloff, plunging their prices. Bond yields rise when prices fall.
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