Resilient Treasuries

In the bond market, most forecasters at this time last year were anticipating a faster pace of Fed tightening to send Treasury yields higher, with the average estimate for 10-year rates coming in at 3.08 percent. Yields have stayed low -- at 2.19 percent on Tuesday -- as tepid U.S. inflation and signs of economic stress in emerging markets kept the Fed on hold until December.

Janney Montgomery Scott LLC’s Guy LeBas, the most-accurate forecaster of the Treasuries market this year, says 10-year rates will end next year almost exactly where they are now, at 2.22 percent. His outlook for low inflation and weak economic growth puts him at odds with the median estimate in a Bloomberg survey, which sees 10-year yields rising to 2.75 percent.

“The call for materially higher interest rates was inconsistent with the facts on the ground,” said LeBas, the chief fixed-income strategist at Janney Montgomery in Philadelphia, who expects the Fed to lift its benchmark rate twice next year.

‘Quite Dangerous’

As for the rest of the global bond market, Mitsubishi UFJ Kokusai Asset Management’s Hideo Shimomura says investors should position for a narrow trading range in the sovereign debt of Japan and Germany as bond purchases by the European Central Bank and Bank of Japan keep yields near record lows.

Shimomura, whose bullish calls on government notes in 2015 proved prescient, is also bullish on bonds in Australia as low inflation gives the central bank room to cut interest rates. He’s avoiding the high-yield corporate debt market, which is heading for its first annual decline since 2008 amid a collapse in earnings at raw-materials producers and a flood of investor redemptions from junk bond funds.

“The high-yield sector is quite dangerous,” said Shimomura, the chief fund manager at Mitsubishi UFJ Kokusai, which has $98.8 billion in assets.