Morgan Stanley’s Caron Follows Fidelity Eyeing 2% Treasury Yield

(Bloomberg) -- The bond-market rout is coming to an end, judging by forecasts from two of the biggest investors.

U.S. 10-year yields will have trouble climbing too far past 2 percent from 1.81 percent Wednesday, according to Jim Caron at Morgan Stanley Investment Management, which oversees $406 billion. At Fidelity Investments, with $2.1 trillion, strategist Tom DeMarco in the company's trading arm, said in October he wouldn't be surprised to see 2.1 percent, though yields may fall in January.

“Nobody really believes that rates can just rise very very quickly, or that bond prices can fall off a cliff,” Caron, who is based in New York, said Tuesday on Bloomberg Television. “You're not seeing the growth. You're not really seeing the inflation.” Morgan Stanley, the company's parent, is one of the 23 primary dealers that underwrite U.S. debt.

The bulls are taking an interest as yields climb to the highest level since May. South Korea's Government Employees Pension Service said it plans to buy at 2 percent. An investor at Asset Management One Co. in Tokyo said Tuesday he's sticking with U.S. long-term debt as consumer prices stay in check. Traders are betting the Federal Reserve will refrain from raising interest rates at the end of a meeting Wednesday and act in December, futures contracts indicate.

Treasuries rose Wednesday, pushing the 10-year yield down two basis points as of 7:10 a.m. in London. The price of the 1.5 percent security due in August 2026 advanced 1/8, or $1.25 per $1,000 face amount, to 97 6/32, based on Bloomberg Bond Trader data. The yield rose to 1.88 percent Tuesday, extending its push to the highest levels since May 31.

Treasury Holdings

Fund managers boosted Treasury holdings to 24.5 percent of assets last week, matching the most since March, according to a weekly survey of portfolio investors conducted by Stone & McCarthy Research Associates, a fixed-income research firm in Princeton, New Jersey. 

U.S. 10-year yields will fall to 1.73 percent by Dec. 31 and then climb to 2.11 percent by the end of 2017, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.
 
“Should GDP growth in the fourth quarter come in below 2 percent, we may see bond rates fall in January as markets reassess the pace of rate hikes,” DeMarco wrote on the Fidelity website last month. “There are still some structural issues holding down yields, from aging populations in developed markets to relatively high global debt levels.” Fidelity is the largest holder of U.S. debt after the Fed and Vanguard Group Inc.

For more on the issues facing the Federal Reserve, click here.

For Asset Management One, overseeing about $482 billion, the inflation rate is reason to stick with Treasuries, Yusuke Ito, a money manager at the firm, said Tuesday. A gauge of U.S. consumer prices monitored by the Fed rose 1.2 percent in September from a year earlier, a report showed this week, short of the central bank's 2 percent target.

It's almost time to start stocking up on U.S. debt for Kim Young-sung, the head of overseas investment in Seoul at South Korea's Government Employees Pension Service, which has $13 billion in assets. “If it goes above 2 percent, I'm going to start buying Treasury bonds,” he said. “If it goes further, then I will buy more.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Naoto Hosoda, Jonathan Annells