The climb in Treasury yields, sparked by last week’s sell off, is unlikely to prove permanent in the near term says Merrill Lynch Wealth Management’s Bill O’Neill.
Mid-March may prove to have heralded the end of a “30-year bull market in government fixed debt”, says the Merrill Lynch Wealth Management chief investment officer for Europe, Middle East and Africa, but recent strengthening of the US economy is not enough to prompt the Federal Reserve to raise rates before 2014.
“The loss on a 30-year US Treasury bond is close to 4.5% in a single week. Yields increased by 30 basis points in US 10-year Treasuries but were stable at the short end, causing a sharp steepening of the yield curve,” he says.
“Short-term US Treasury yields remain low and have seen only a small move higher,” he explains.
“Confidence in a shift in Fed stance would likely cause a move higher in short-term yields, almost certainly provoking a major sell-off in longer-dated Treasuries and global government debt as the post-crisis monetary easing would be viewed as having ended.”
The fact that the US is eight months away from a presidential election is an additionally strong contributing factor that will likely keep rates “exceptionally low” until 2014, according to O’Neill.