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Treasury Yields Expected To Creep Higher

Yields on 10-year Treasuries appear to have bottomed out and are expected to rise gradually in the fourth quarter, according to market professionals.

Yields on 10-year Treasuries appear to have bottomed out and are expected to rise gradually in the fourth quarter, according to market professionals. The benchmark note widened 10 basis points from its recent low of 3.99% last Monday to the middle of last week and is expected to continue to back up. Lehman Brothers forecasts 10-year Treasuries will hit 4.4% by the end of the year and 4.8% by the end of 2005, according to Drew Matus, economist in New York.

Last week's move higher appeared to be prompted by a stronger-than-expected economy, with second quarter gross domestic product up 3.3% versus a consensus 3% rise. Rising oil prices are also not doing the bond market any favors; oil broke the $50 barrier last Monday in after-hours trading before cooling off to below $49 by the end of the week. "The market is looking at if oil prices will slow the economy enough to toss the U.S. into another recession," Matus said.

The decent clip of economic growth makes the low yields on the 10-year seem unusually depressed, analysts say. One researcher speculated that yields on the 10-year Treasury note should be about 60 basis points higher, or around 4.7%.

As for higher oil prices, they are seen as more of a crimp on the economy than as a factor in fueling inflation, said Steve Ricchiuto, chief U.S. economist at ABN AMRO in New York. "People are more worried about a negative growth shock than an inflation shock," he noted.

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