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[TOKYO] JPMorgan Chase & Co is cutting its forecasts for yields on longer-maturity Treasuries even as it stands by its call for the Federal Reserve to begin raising interest rates in September. The reason: Oil.
Tumbling energy prices will weigh down the outlook for inflation, supporting demand for longer-term debt, say analysts at the bank, one of the 22 primary dealers that underwrite US government securities and trade directly with the central bank. That'll reduce their yield premium over shorter-maturity notes as the Fed begins tightening monetary policy, they forecast.
"Global demand for longer-term Treasuries remains strong and inflation expectations remain muted," analysts including Jay Barry, Bruce Sun and Phoebe White wrote in a report dated Aug 7.
"We continue to view short-term yields as underestimating both the timing and pace of the coming Fed rate hikes." After cutting its oil price estimates, JPMorgan lowered its year-end forecast for 10-year Treasury note yields to 2.50 per cent from 2.55 per cent, while holding predictions for two- year notes at 1.25 per cent.
That would leave the yield gap between the two at 1.25 per centage points, compared with 1.49 points at 9:27 am New York time.
Traders see 52 per cent odds of the Fed raising interest rates in September - compared with 40 per cent at the end of last month - after data showed US employers added more than 200,000 jobs for a third straight month in July. The calculations assume that the effective fed funds rate will average 0.375 per cent after the first increase.
"We will see another big leg up in short-term rates, leading to a further flattening of the yield curve," said Kazuyuki Takigawa, who manages about US$6 billion of bonds as the chief fund investor for foreign fixed income at Resona Bank Ltd in Tokyo. "I don't expect a big rise in the inflation rate."