Treasury yields too low: TCW
NEW YORK (Reuters) - The Treasury market has been distorted by the Federal Reserve's policies, causing yields to be "too low for too long," and the market faces volatility next year, a top fixed-income strategist with TCW said on Wednesday.
The Treasury market sold off viciously over the last two days as traders began to unwind earlier bets on the Fed's second round of quantitative easing, Tad Rivelle, chief investment officer of U.S. fixed income at TCW, told the Reuters 2011 Investment Outlook Summit.
He called the trend "a return to bond vigilantism," invoking a term coined by economist Ed Yardeni in 1984 to describe why major investors were demanding higher yields to compensate for perceived risks of rising inflation as a result of large deficits.
"The deeply distorted Treasury market is not an unintended but a very direct consequence of what the Federal Reserve as well as other policy actors have been attempting to foster and bring about," Rivelle said.
Treasury yields have climbed as traders exited bets placed prior to the Federal Reserve's announcement of a new round of quantitative easing, known as QE2, on November 3. Compounding the market sell-off this week was a proposed deal between Democratic U.S. President Barack Obama and Republican lawmakers to extend Bush-era tax cuts and to reduce payroll taxes.
"The Treasury market is not in for smooth sailing over the course of 2011," said Rivelle, who oversees more than $111 billion at TCW, the U.S. asset management unit of French bank Societe Generale SOGNNY.UL.
He said current levels on Treasury yields remain far below what he considers fair value against the backdrop of long-term inflationary pressures. He forecast long-term U.S. inflation running in a range of 2.0 percent to 2.5 percent.
He said the three-month T-bill rate should be valued near 2.50 percent, the two-year note yield at close to 3.00 percent, and the 10-year debt yield near 4.00 percent.
As of Wednesday afternoon, the three-month bill rate was last quoted at 0.14 percent, the two-year note yield at 0.60 percent, and the 10-year debt yield at 3.22 percent.
(Reporting by Richard Leong; Editing by Leslie Adler)
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