Yields on 10-year Treasuries may fall as much as 150 basis points before the end of next year as the Federal Reserve cuts interest rates to bolster a slowing US economy, according to Jupiter Asset Management.
The Fed’s most aggressive rate-hike cycle since the 1980s will take a toll on economic growth, and prompt the central bank to execute a policy pivot, said Matthew Morgan, head of fixed income at Jupiter Asset. The firm managed around $63 billion of assets as of end-March.
Markets “can easily see yields coming down 100, 150 basis points at the long end if a recession starts to bite,” Morgan said in an interview in Singapore on Wednesday. “And that can be really quite violent — particularly if growth is falling while inflation is falling.”
After a tumultuous 12 months characterized by large swings in Treasuries, investors are trying to gauge when the US central bank may switch to cutting rates, with some predicting a recession. Prominent voices such as DoubleLine Capital’s Jeffrey Sherman say an easing is inevitable although others including Bill Gross caution against positioning for a bond bull market.
Money markets are pricing for the Fed to unleash as much as 125 basis points of rate cuts in 2024.
Yields on benchmark 10-year Treasuries have declined by almost half a percentage point from their October peak to around 3.84% amid signs that the Fed’s rate-hike campaign may be drawing to a close. A 150-basis point drop will bring yields to around 2.34%, which would be the lowest since early 2022.
During the global financial crisis in 2008, the 10-year benchmark had plunged by 181 basis points. There was a similar drop back in 2011, when it fell by more than 140 basis points, according to data compiled by Bloomberg.
For Morgan, who joined Jupiter in 2019 after spending more than a decade at BlackRock Inc., government bonds remain some of the best assets to own should global growth falter.
Jupiter favors sovereign debt sold by Australia and South Korea. Morgan said some of the firm’s strategies are also to start buying UK bonds as rates soared after the Bank of England embarked on its most aggressive tightening cycle in four decades.
“We’ve also been nibbling a little bit into the UK because rates have moved so far,” London-based Morgan said. “The UK economic situation looks pretty weak from here.”
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