July 02, 2013 | By Scott Minerd, Global CIO
Recent volatility in the bond market is a direct result of investor reaction to recent statements by U.S. Federal Reserve Chairman Ben Bernanke. The central bank’s stronger-than-expected economic projections and the implications for a faster tapering of quantitative easing caused the recent sell-off in U.S. Treasuries. In the near-term, a number of factors suggest that long-term rates can continue to climb higher. Whether valuing long-term rates by economic fundamentals, technical indicators or a number of other methods, our analysis suggests that the yield on 10-year Treasuries could rise above 3.25 percent by the end of the summer, to as high as 3.50 percent.
These higher rates are likely to be short lived, however. The housing market is already feeling the impact of higher mortgage rates and by August the full effect those rates have on housing affordability will begin to show up in economic data. Given the increasing importance of housing to the overall economic recovery, a drag on housing activity will undoubtedly hold back GDP growth. Once the economy begins to cool, lower interest rates will follow.
Historically, the spread between the yield on 10-year U.S. Treasuries and the federal funds target rate has never exceeded 400 basis points. As the U.S. Federal Reserve remains committed to keeping the federal funds rate unchanged in the 0-0.25 percent range for a considerable period of time, the current rally in 10-year Treasury yields is unlikely to push beyond 4 percent without a rate hike.
Source: Bloomberg, Guggenheim Investments. Data as of 6/30/2013.
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