Analysts at Societe Generale\’s cross-asset research department expect yields on the benchmark 10-year Treasury note to rise to 2.75% by the end of 2013 as improving economic data leads to increased confidence of a long-term recovery, according to a research note Monday.
However, without the actions of the Federal Reserve, the fair value 10-year yields is 3.5%, the analysts wrote. The Fed currently buys $85 billion in Treasury and mortgage debt every month in order to keep interest rates low.
The third quarter of 2013 could be a turning point for Treasurys. That time frame allows for the impacts of the payroll tax increase and sequester to be felt. If economic data shows consistent improvement, the Fed could begin to signal a slowing down in monthly purchases.
“Such a move, which could come around mid-year, would probably prompt the Treasury market to move dramatically, even if actual purchases by the Fed were to continue to year end,” the analysts wrote.
The research note also suggests the Fed’s slowing of asset purchases could be more significant for agency mortgage-backed securities, or those supported by government affiliates like Fannie Mae and Freddie Mac, than for Treasury debt purchases. The Fed is the dominant buyer of agency MBS while foreign central banks play a major role in the Treasury market.
– Saumya Vaishampayan
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