Bond-Yield Forecasters Disagree on 2020 After 2019 Surprise
December 12 2019 - 8:29AM
Dow Jones News
By Daniel Kruger
Investors are split about the direction of government-bond
yields in 2020, a sign of confusion about the course of the economy
and monetary policy.
Economists surveyed last month by The Wall Street Journal
predicted that the yield on the benchmark 10-year Treasury note
could end next year above 3% or just slightly higher than 1%. The
average forecast of 1.97% was only modestly higher than where the
yield settled Wednesday, at 1.786%.
The differing views reflect uncertainty after this year's bond
rally surprised forecasters, many of whom had predicted yields to
climb as investors sold government debt. Instead, economic growth
cooled, trade tensions intensified and bond yields reversed a climb
that had sent them to multiyear highs, falling to near all-time
lows.
Investors closely watch the direction of the 10-year yield
because it is a key reference rate for markets, used in setting
borrowing costs on everything from corporate bonds to home
mortgages. The yield tends to rise when investors feel optimistic
about growth and inflation and fall when they are nervous about the
future.
In eight of the past 10 years, economists surveyed by the
Journal predicted the 10-year yield would rise higher than it
did.
If you are an analyst at an investment bank, "no one will ever
fault you for being an optimist," said Peter Atwater, a finance
professor at The College of William & Mary. "Higher yields
represent optimism."
While the range of forecasts is broader than last year's, most
economists are predicting that the economy will continue to grow at
a pace close to this year's expansion of about 2% and that the
Federal Reserve will likely keep interest rates steady after
cutting them three times this year.
Analysts remain divided, however, about the likelihood that the
U.S. and China can ease the trade tensions that contributed to this
year's global economic slowdown. Some remain unsure whether the
Fed's interest-rate cuts did enough to brace the economy against
the impact of slower global growth. And the U.S. presidential
election could lead to changes in tax and spending policies,
potentially affecting the path of the economy.
"The policy outcomes that could come out of the 2020 election
are historically divergent--it's probably about 40, 50 years since
we've seen the potential for such a wide range of policy outcomes,"
said Mike Pyle, global chief investment strategist at BlackRock
Inc. "That is a naturally uncertain environment for investors."
Trade remains a key variable affecting investors' predictions
for bond yields next year.
Few economists thought that the negotiations between the U.S.
and China would continue to provide a source of friction for this
long.
"Most people--and I'm including myself--thought we'd see a trade
deal by now," said Steven Blitz, chief U.S. economist at TS
Lombard. This year's disappointment notwithstanding, Mr. Blitz is
forecasting that talks between the U.S. and China will lead to a
preliminary agreement.
A surge in business and consumer confidence stemming from
progress on trade is likely to help spur growth next year, leading
to improved risk appetite among investors and reducing the demand
for the safety of government bonds, Mr. Blitz said. He said he is
predicting the 10-year yield will climb to about 2.5%.
"With plenty of fits and starts and histrionics along the way,
you're moving from disorder to order," Mr. Blitz said regarding
trade.
Other economists aren't as convinced policy makers have
mitigated slowing growth.
While job growth in recent months has exceeded expectations,
Lindsey Piegza, chief economist at Stifel Financial, is skeptical
that the Fed's three rate cuts this year have done enough to
sustain the economy into 2020. She points to the slowing pace of
wage growth as a key sign of a slowdown. She is predicting the
10-year Treasury yield will fall to 1.55%.
"My biggest concern is prolonged anemic growth," Ms. Piegza
said.
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Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
December 12, 2019 08:14 ET (13:14 GMT)
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