David Ader, chief Treasury strategist at CRT Capital, said rates could continue to move lower and should stay low for some time. He said he may revisit his year-end 10-year yield target of 2.65 percent which he forecast when oil prices were still in the high $60s. West Texas Intermediate futures for February were trading at about $48 per barrel Tuesday.
"At the moment it looks too high," he said. "I may have to be talking about a 1.50/1.75 lower end of the range and that simply because we will be driven by the lower rates in Europe," he said. Ader said the dollar could actually end up trading at parity with the euro—at 1.18/1.19 Tuesday—and that would drive 10-year yields to 1.50 percent.
Cliff Noreen, president of Babson Capital, expects the 10-year to yield in a range of 1.50 to 2.50 percent this year.
"I concur with the views that we're going to see lower rates more from looking at a relative value basis across the globe," said Noreen. But he said the collapse in oil prices is something that concerns him. "I'm worried about it economically. Every investment and management firm is looking at possible impacts to their portfolio, their clients and they're trying to get a handle on it."
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Market anticipation of a new European Central Bank quantitative easing program has helped drive European—and U.S.—rates lower. The ECB meets Jan. 22, three days before general elections in Greece, another factor setting markets on edge.
"I think the ECB is being way overemphasized as a relative topic. We look at Germany having a negative five-year rate. If they do QE, how much lower can rates go?" he said.
Pimco's Crescenzi said while the decline in yield has more to do with global forces, there are other factors.
"One thing we've thought through for a long time is the supply of safe assets globally has been shrinking in the trillions of dollars," he said, noting sovereign ratings downgrades have contributed to that. "Also, the U.S. budget deficit has fallen sharply this year. It will be under $500 billion, so the issuance of Treasurys has diminished at a time when global demand for safe assets has increased because of global volatility."
Crescenzi does see rates at the long end staying unusually low for some time, but not this low.
Crescenzi said the 10-year yield has moved away from fair value. "We think it has moved beyond its fundamental value at these levels but we recognize the global forces in play," he said. "It would be surprising if it stayed below 2 percent this year." The 10-year started 2014, yielding 3 percent.
Goncalves said another factor that could keep rates low is the large short position in Treasury futures. He said there are $28.7 billion in short positions across the Treasury futures complex, just below a level of $29 billion in mid-December, the highest level post-financial crisis.
As shorts cover, they could help drive rates even lower. Goncalves said the next target the market will look to hold is 1.85 percent.
Goncalves said the Treasury market may be more dramatic since the start of the year but the reasons behind the trading are not new. "People have woken up and they're pretty grumpy. It's a grumpy start for the year."