Sonal Desai, chief investment officer of Franklin Templeton’s $152 billion fixed-income group, has an upbeat view of the U.S. economy that’s persuaded her to go against the grain in the Treasury market.
While much of the Wall Street crowd sees a decline in yields, she believes Treasury 10-year rates could jump toward 3% by year-end from just above 2% now. That should happen as a stream of solid reports prompts a swift reappraisal by investors of the economy’s health, she said.
“We should not underestimate the speed with which the market can reprice,” Desai said in an interview. Recent history shows rapid moves are possible: 10-year yields were at 3.25% in November, plunged as low as 1.94% this month and have since climbed to 2.13%.
“Can the 10-year yield get to 2.50%, 2.60%, 2.75% this year? Why not?” she said. The economy is in “incredibly good health,” she added, pointing to the better-than-estimated 224,000 jump in U.S. payrolls in June. Desai is finding “select” opportunities in U.S. corporate debt rated triple B that will do well under a scenario of rising yields.
Overshooting
When speaking before Congress this week, Federal Reserve Chairman Jerome Powell signaled that the central bank is preparing to cut interest rates. His testimony made Desai more confident that a 3% benchmark U.S. yield is “achievable” because “both the markets and the Fed are overshooting in pushing yields lower, setting the stage for a rebound,” she said. Desai expects Fed officials to deliver a 25-basis-point reduction on July 31, when the more “sensible” approach would be to remain on hold.
This is not the first time this year that Desai is forecasting higher Treasury yields, a call she’s made as the bonds rallied through the months. She said in February that the 10-year yield could reach 3.5% in the medium term, and made a 3% or more prediction in April. Other market participants including Credit Suisse Group AG and JPMorgan Chase & Co. have also warned that bonds are at risk of a sell-off.
This article was provided by Bloomberg News.