Treasury yields are currently way too low, and should be between 3.5% and 4.1% on the 10-year, according to Societe Generale’s Aneta Markowska.
Markowska believes that on a fundamental basis, treasuries should be in this range. However there are a number of reasons why yields are currently so low:
- The Greek crisis pushing investors into risk off positions
- QE impacting the yield
- Pessimistic views on the economy from U.S. investors
However, if things turn around in H2, as Markowska expects, we’re likely to get a rise in yields.
From Aneta Markowska:
If anything, we see upside risks to our fundamentally- derived fair values for Treasury yields. Core inflation has been normalizing much faster than expected and many businesses seem keen on passing through cost hikes. Whether they are successful or not remains to be seen but the desire to raise prices seems stronger than we have seen in years. The rental market is also getting tight and the housing component could push core CPI further up. Lastly, the inflationary pressures in China could also start showing up in US import prices.
Though we do not anticipate the end of QE2 to have a meaningful impact on yields, the transition to price- sensitive buyers could exacerbate any moves tied to stronger economic data. We look for the 10-year yield to reach 3.50% by the end of Q3, which would put it at the lower end of our fundamental range.
There are, of course, other factors that could drive treasury yields higher. If the Greek situation is resolved, the eyes of world markets may turn to the U.S. debt ceiling debate. Risk that that could escalate into a default scenario may not have been priced in yet. As such, investors could react to that concern. Or, conceivably, any post Greek resolution rise in treasury yields could be construed as markets being concerned about the U.S. debt situation, when it is actually just a return to risk on.
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