Yields on the 10-year Treasury jumped after the Federal Reserve said it could begin tapering its monetary stimulus later this year.
But even if the Fed scales back its pace of bond purchases in the second half of 2013, investors shouldn’t expect rates to finish the year much higher than where they are today. My expectation is that by year’s end, the yield on the 10-year Treasury will be trading somewhere between 2.25% to 2.5%. [Treasury ETF Sell-Off Continues]
This is because there are a number of factors conspiring to keep rates low even if the central bank slows its buying. Here’s a look at three.
1.) The Supply and Demand Situation for Treasury Securities. Some market watchers fear that Fed tapering would lead to excess Treasury supply, which in turn would result in higher rates. However, in a recent research report published on Seeking Alpha, my colleague Antti Petajisto drills down into Treasury supply and demand to explain why this scenario isn’t likely.
On the Treasury demand side, Antti points out that foreign central banks are big buyers of Treasuries, i.e. the Fed isn’t the only large player in the Treasury market. Meanwhile, on the Treasury supply side, he notes that a rapidly shrinking Federal budget deficit is leading to reduced Treasury issuance.