Financial advisors should not expect higher rates for the rest of this decade on the 10-year Treasury, as global economies struggle with slow growth, aging populations and debt overhangs, said Tony Crescenzi, executive vice president and portfolio manager at Pimco.
“The idea of a ‘new neutral’ [for the 10-year] seems to be around two percent right now in the U.S.,” Crescenzi told advisors Monday at the American Institute of Certified Public Accountants’ Personal Financial Planning Section conference in Las Vegas.
And it's not likely to move that much for a long time. Pimco is forecasting a two to two-and-a-half percent yield on the 10-year bond through 2020.
That’s the rate that will neither stimulate nor slow the economy. “If it breaks two percent like last week, it probably isn’t going to stay there very long,” Crescenzi told attendees at the AICPA's annual financial planning event.
Slow global growth, lower potential output, quantitative easing in Europe and Japan, slow credit growth, cautious consumers and aging populations will keep a lid on higher long-term rates, Crescenzi said. The 10-year yield will likely have a “beta” of around 0.25 compared to the Fed funds rate, he said, moving up about a quarter point with each percentage point hike in the short rate.
Pimco expects the Fed to hike rates three more times this year, even though Fed has told the markets to expect four. “Even three seems like a stretch now” with the stock market sell-off, Crescenzi said.
But if the labor market and inflation meet the Fed’s expectations, the central bank might be able to stick to its schedule, he added. That would be jobless rate of 4.5 to 4.6 percent, and inflation on track to reach the Fed’s two percent target. By year-end, Pimco expects to see a 1.6 percent growth rate in the core Personal Consumption Expenditures (PCE) index.
The Fed also expects substantial slowing in job growth beginning this quarter, falling to under 100,000 new jobs per month at the end of the year and beyond. That won’t stop rate hikes, Crescenzi said, because that rate of job growth should be enough to accommodate new job seekers and keep unemployment low.
Despite the attention on the Fed’s next moves, the biggest uncertainty in global markets now is China, he said. “The problem is that China is not making clear how low it will let the yuan go,” Crescenzi said, after it began a devaluation process last summer.
Other Asian currencies will also weaken as “China moves lower and tries to win back market share from the rest of the world” through currency devaluation, he said.