While they’ve ratcheted down their forecasts this year, they predict 10-year yields will increase to 3.36 percent by the end of December. That’s more than 0.6 percentage point higher than where yields are today.
“My forecast is 4 percent,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG, a primary dealer. “It may seem like it’s really aggressive but it’s really not.”
LaVorgna, who has the highest estimate among the 66 responses in a Bloomberg survey, said stronger economic data will likely cause investors to sell Treasuries as they anticipate a rate increase from the Fed.
History Lesson
The U.S. economy will expand 2.7 percent this year from 1.9 percent in 2013, estimates compiled by Bloomberg show. Growth will accelerate 3 percent next year, which would be the fastest in a decade, based on those forecasts.
Dealers used to rely on Treasuries to act as a hedge against their holdings of other types of debt, such as corporate bonds and mortgages. That changed after the credit crisis caused the failure of Lehman Brothers Holdings Inc. in 2008.
They slashed corporate-debt inventories by 76 percent from the 2007 peak through last March as they sought to comply with higher capital requirements from the Basel Committee on Banking Supervision and stockpiled Treasuries instead.
“Being a dealer has changed over the years, and not least because you also have new balance-sheet constraints that you didn’t have before,” Ira Jersey, an interest-rate strategist at primary dealer Credit Suisse Group AG, said in a telephone interview on April 14.
Almost Guaranteed
While the Fed’s decision to inundate the U.S. economy with more than $3 trillion of cheap money since 2008 by buying Treasuries and mortgaged-backed bonds bolstered profits as all fixed-income assets rallied, yields are now so low that banks are struggling to make money trading government bonds.