The Federal Reserve could cut interest rates this year, sending Treasury yields tumbling as the risks of a recession become ever more real, according to Jupiter Asset Management.
(Bloomberg) — The Federal Reserve could cut interest rates this year, sending Treasury yields tumbling as the risks of a recession become ever more real, according to Jupiter Asset Management.
A global downturn spurred by the most aggressive US rate hikes since the 1980s could see 10-year Treasury yields fall to as low as 2% as investors rush to haven assets, said Ariel Bezalel, a money manager in London. That’s almost 160 basis points lower than where the notes were trading on Wednesday, even as Treasury yields dropped following gains in European government debt.
“There is enough data for the Fed to soon go on hold,” he said. “My concern is if the Fed doesn’t back off soon, they could well cause a hard recession.”
While firms from Fidelity International to Pictet Wealth Management favor US government debt, few investors are as bullish as Bezalel after the bonds suffered the biggest annual loss on record as the Fed raised rates to vanquish runaway price growth. Yields on 10-year Treasuries soared to as high as 4.34% in October, though benchmark yields have since retreated as risks of a recession mount. They last traded at 2% or lower in March.
The yield on 10-year US Treasuries fell about five basis points on Wednesday, supported by gains in Europe’s bond market. Italy outperformed, sending the 10-year yield as much as 16 basis points lower to 4.06%. Gilts also rose, sending the 10-year yield lower by 8 basis points to 3.48%.
Bezalel, whose firm oversees $53 billion, has bullish bets on US, Australian, and Korean government debt on expectations the bonds would gain in the event of a downturn.
Recent economic data back Bezalel’s view. US wage growth cooled in December, prompting investors to pare expectations of the Fed’s resolve to aggressively hike borrowing costs. Swap contracts show traders now expect the Fed funds effective rate to peak below 5%, down from 5.06% before the wage data on Friday.
A number of Fed officials have indicated that they expect to lift their policy target — currently a range of 4.25% to 4.5% — to more than 5% and keep it there for some time. Analysts meanwhile place a 70% probability on a recession occurring within a year, the highest since July 2020.
“The slowdown over the course of this year will be too severe and the weakness in inflation will pave the way for the Fed to probably shift from a hawkish bias” in the second half, he said. “There’s a substantial probability of a rate cut before the end of the year.”
–With assistance from James Hirai, Alice Gledhill and Aline Oyamada.
(Adds bond moves in second and fifth paragraphs.)
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