Standish Report Sees New Range for 10-Year Bond
BOSTON, March 28, 2012 — Rising yields on 10-year U.S. Treasury bonds should not be viewed as a sign of the beginning of a bear market in the bonds, according to Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon Asset Management.
Instead, the Standish paper predicts the 10-year Treasury yields may settle into a new higher trading range between 2.25 percent and 3.00 percent by the end of 2012. Fair value for the bonds is approximately 3.30 percent, according to Standish's bond model.
Standish made the observation in its April outlook, written by Thomas D. Higgins, global macro strategist for Standish. The April outlook was issued after 10-year U.S. rates rose from less than 1.9 percent at the beginning of the year to 2.4 percent in late March 2012. The rise has been driven by a combination of better-than-expected U.S. economic data and a reversal in the flight-to-safety bid as the risk of a European banking crisis has appeared to subside, according to the report.
"While speculation is rising that the long-awaited bear market in bonds has arrived, we believe that such thinking is premature," Higgins said. "There are a number of factors that could limit how far interest rates can rise in the short term, including the Federal Reserve's intervention in the Treasury market to keep long-term interest rates low."
Other factors that may keep rates low cited by the report include:
- Americans continue to deleverage from the housing boom of 2002 to 2007 as households continue to allocate a portion of income to debt repayment. This could mean below-trend economic growth, modest inflation and lower long-term interest rates.
- Demand for Treasuries from banks and other financial institutions has increased as they become more conservative in their lending and investing.
- Geopolitical risks and potential policy mistakes could push interest rates back down toward their recent lows.
"U.S. investment grade and high yield corporate bonds continue to offer an attractive yield versus Treasuries in the current low-rate environment," said Desmond Mac Intyre, chairman and chief executive officer of Standish. "We expect these sectors to perform well given positive economic growth and muted corporate defaults."
Standish Mellon Asset Management Company LLC, with approximately $86 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), core / core plus and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in Insurance and liability driven investing. The firm also includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon.
BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.
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