JPMorgan joins Goldman Sachs in calling 2% Treasury yield

Singapore

JPMORGAN Chase & Co says the benchmark Treasury yield can climb as high as 2 per cent this year, joining Goldman Sachs Group Inc in predicting a level unseen since March.

The US sovereign 10-year yield completed its biggest three-day gain in almost a month on Tuesday, amid rising bets for higher interest rates by year-end.

Federal Reserve Bank of Richmond president Jeffrey Lacker said policymakers need to act to head off a likely pickup in inflation, ahead of the release of closely watched payrolls data on Friday.

Treasuries also fell in sympathy with bunds after a Bloomberg report said the European Central Bank will gradually wind down bond purchases before the conclusion of its quantitative-easing program.

"An improved growth outlook continues to bolster an outlook for higher interest rates in the fourth quarter," JPMorgan strategists led by Jay Barry in New York wrote in a client note dated Oct 4. "We think the 10-year yield can stretch as far as 2 per cent."

The 10-year Treasury yield was little changed at 1.68 per cent at 6.40am in London, following a three-day, 13-basis-point increase. The price of the 1.5 per cent note due August 2026 was 98 3/8.

The benchmark yield dipped to a record-low 1.318 per cent on July 6, when the market-implied odds of higher US rates by December stood at just 12 per cent. The probability is currently 61 per cent, the highest in two weeks, according to Bloomberg calculations based on Fed fund futures.

The Federal Open Market Committee left its benchmark rate unchanged last month, noting the case for an increase had strengthened and described risks to the economic outlook as "roughly balanced". The US probably added 174,000 jobs in September, according to an estimate in a Bloomberg survey of economists, up from 151,000 the month before.

Like JPMorgan, economists at Goldman Sachs see benchmark Treasury yields climbing to 2 per cent by year-end, fuelled by an improving outlook for inflation and economic growth. Faster inflation hurts the value of bonds' fixed payments.

The weighted average forecast of analysts in data compiled by Bloomberg is for the yield on the benchmark note to end the year at 1.74 per cent. BLOOMBERG