(Bloomberg) -- Treasury 10-year yields may decline to 1.75% by year-end if the U.S.-China trade war goes full throttle, according to Western Asset Management.
Yields may keep falling even though they have already tumbled to about 2.10% from a seven-year high of 3.26% set in October, according to Mark Lindbloom, a portfolio manager at the firm that oversees $436 billion. The trigger: a cocktail of slowing inflation, cooling global growth and a worsening in U.S.-China trade tensions.
“There's nothing special about 2% for 10-year notes,” Lindbloom, who co-manages a fund that beat 97% of its peers in the past year, said in an interview in Singapore. “If we were to go down that path, we would be quick to add duration.”
Federal Reserve policy makers will meet Tuesday and Wednesday to set rates, with many economics and bond traders ratcheting up bets they will ease this year to boost the economy. Futures traders have priced in about a quarter point of easing next month, and more by year-end.
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Strategists at Charles Schwab Corp. and UBS Group AG say traders may be wrong to factor in only negative trade outcomes that would spur an imminent reduction in borrowing costs. Lindbloom agrees the market may have “gone ahead of itself” in pricing such aggressive expectations of Fed cuts.
“We think we're going to get at least one cut this year,” he said. “But we doubt we will see it as early as this week or even in July. We think later in the year is more probable.”
Here are some other views from Lindbloom:
- Western Asset is short dollar in its funds that allow such exposure
- Firm is long emerging-market rates and currencies including those of Mexico, Brazil, Argentina, Russia, India and Indonesia
- Recently took profit on some Treasury holdings
- Still likes long-dated U.S. paper such as debt due in 20 years; also favors one- to three-year part of the curve
- Fed is likely to cut rates in September
- Greatest risk to markets is slowing global growth
To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Joanna Ossinger, Nicholas Reynolds
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