March 28, 2012

Rising Yields on Treasuries Should Not Lead to Bear Market for Bonds, According to BNY Mellon


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.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets.  BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team.  It has $25.8 trillion in assets under custody and administration and $1.26 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day.  BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).  Additional information is available on www.bnymellon.com or follow us on Twitter@BNYMellon.

All information source BNY Mellon Asset Management as of December 31, 2011. This press release is qualified for issuance in the US only and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorized. This press release is issued by BNY Mellon Asset Management to members of the financial press and media and the information contained herein should not be construed as investment advice.  Past performance is not a guide to future performance. A BNY Mellon Company(SM)