By Daniel Kruger
Analysts are split on 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 Thursday, at 1.901%.
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 has been an important variable affecting investors' predictions for bond yields. 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.
A surge in business and consumer confidence stemming from a preliminary trade deal is likely to 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%.
Mr. Blitz said the important thing for investors was to take a first step and that the "thornier aspects" of the trade dispute, such as intellectual property rights, can be addressed in a subsequent deal.
"With plenty of fits and starts and histrionics along the way, you're moving from disorder to order," he said.
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.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
December 12, 2019 18:37 ET (23:37 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.