Yield on 10-year T-note likely to range between 2.5% and 3.5% through 2014, says Swiss Re Chief Economist, Kurt Karl

After today’s decision by the Federal Reserve to maintain the target fed funds rate at zero to 25 basis points, Swiss Re’s Chief Economist, Kurt Karl, commented that tapering off purchases of assets will keep yields on the 10-year Treasury note elevated through next year.

Karl added: "The tapering is expected to begin soon and end in the middle of 2014. Thus, yields on the 10-year Treasury note are likely to range between 2.5% and 3.5% for the rest of this year and through 2014."

Karl continued that expectations of real Gross Domestic Product (GDP) growth will be the key determinant of the yield, since the tapering has already been priced into the market. The current quarter will be weak, around 1.5%, but Q4 and next year will be more robust as the effects of the tax increases and spending cuts abate and housing continues its recovery.

He commented: "After six quarters of contraction, the euro area economy emerged from recession in Q2. Growth was driven by Germany (+0.7% q-o-q) and France (+0.5%) while the pace of contraction eased in Spain (-0.1%) and Italy (-0.3%). The euro area recovery is expected to continue at a moderate pace. A more robust upswing is likely to be prevented by fiscal austerity, private sector deleveraging, structural rigidities and tight credit conditions in the peripheral economies. Yields on the 10-year German bonds will rise to 2.3% by end-2014."

Karl added that the improvement in the UK economy has been particularly strong, with real GDP growth of 2.9% (SAAR) in Q2. "As a consequence, we have raised our GDP growth forecast to 2.2% for 2014 and the year-end 2014 yield on 10-year gilts to 3.3%", he explains.

He also said: "In Asia, Japan is expected to continue growing at about a 1.5% pace, despite the sales tax increase scheduled for April 2014 and inflation will pick up to 2%. China is also projected to have a modest improvement in growth to 7.8% next year. However, credit conditions remain worrisome and the risk of a hard-landing has increased because efforts to rein in credit growth could lead to a surge of loan defaults and trigger a sharp economic slowdown. "

Swiss Re

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