NEW YORK – A recent U.S. Treasuries rally, fueled by expectations of significantly lower interest rates, is overdone as the economy’s resilience may make it unnecessary for the central bank to lower borrowing costs by as much as the market bets, a BlackRock portfolio manager said.
However, the Fed should have started lowering rates last month to gradually shift toward easier monetary policy, he added.
U.S. Treasury yields, which move inversely to prices, have declined sharply after weak manufacturing data and employment data released last week sparked recession fears and a sharp repricing of bets on monetary policy for the rest of this year.
The rally has made Treasury valuations less attractive, said David Rogal, portfolio manager of BlackRock’s Fundamental Fixed Income Group, in an interview. “We have definitely been more favorable on bonds here but it’s hard to be too constructive at these valuations.”
The rally lost some momentum on Monday, but the two-year U.S. Treasury yield remained about 50 basis points lower than a week earlier, and the benchmark 10-year yield has shed 40 basis points over the past week. On Monday, investors were betting on about 114 basis points in rate cuts for 2024, nearly double the easing expected last week.
The Fed is still expected to start easing at its next meeting in September.
Further Treasury price advances would reflect a rapid weakening of economic growth. However, if the Fed lowers interest rates, Rogal said, he would expect a so-called economic soft landing, a scenario in which inflation decreases without a major slowdown.
Still, he said the central bank should have started cutting rates by 25 basis points at the end of its meeting last week when it kept policy rates unchanged at 5.25%-5.5%.
“Some of what the markets are reacting to is a Fed that now looks a little bit more behind the curve,” said Rogal. This increases the chances of a bigger, 50 basis point cut in September that could seem “a little panicky.”
(Source: ReutersReuters)
