United States Treasury prices extended losses overnight, pushing yields to their highest level since October, however, investment strategists say this does not signal the beginning of a big selloff in the safe haven asset.
“It’s very unusual (to see) the kind of rally we have had in equity markets over the last few months, and not see bonds sell off. This was waiting to happen,” Larry Kantor, Head of Research at Barclays Capital, said. “But I don’t see this as a beginning of a huge selloff in Treasurys.”
The 30-year Treasury bond’s yield increased to 3.42 percent on Wednesday from 3.27 percent late Tuesday, while the benchmark 10-year Treasury note traded lower to yield 2.28 percent, up from 2.13 percent on Tuesday.
Kantor says that “scarcity” of safe haven assets will ensure that heavy selling in U.S. government bonds will be limited.
“If you look at the list of safe assets in 2007, it included things like Fannie debt, Freddie debt, mortgage backed securities, Italian bonds - those are no longer considered safe by investors - so we’ve seen the supply of what investors perceive as safe assets shrink dramatically,” Kantor said.
He believes that higher priced, lower yielding Treasurys will be a “new normal” for the next few years.
Vincent Chaigneau, Head of Fixed Income Strategy at Societe Generale, forecasts the yield for the 10-year note will not exceed 2.50-2.75 percent.
“The economy, despite the positive surprises of late, is not on fire. The PMI (Purchasing Manager’s Index) is not surging like in 2009 and is at a much lower level than in late 2010,” Chaigneau said in a research note.
“Unless growth accelerates – (which is) against our economists’ views – 10-year note should be capped at 2.75 percent,” he added.
However, David Malpass, President at Encima Global, doesn’t agree that demand for Treasurys can be sustained as investors opt for higher yielding assets against the backdrop of an improving U.S. growth outlook and easing concerns over the European debt situation.
“I think we’ve been in a bond bubble and it’s unwinding, as is the gold bubble,” Malpass said.