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NEW YORK, Oct 15 (Reuters) - Benchmark U.S. Treasuries yields should drift higher into year-end after a bond market rally on Wednesday that briefly pushed the 10-year government note yield below 2 percent for the first time in 16 months, according to a top bond officer at BlackRock Inc.
Safe-haven buying of U.S. government debt has surged since last week on fears about the global economy. Weak U.S. data on Wednesday fed those fears.
“Technical market factors, not fundamentals, were at play here” during the bond market rally, BlackRock’s chief investment officer of fundamental fixed income, Rick Rieder, said in a statement on Wednesday, blaming the bond market rally on large players unwinding bets on rising Treasuries yields in the futures markets.
“The extremity of the move suggests that it is highly unlikely to have been caused by a wholesale reevaluation of fundamental economic conditions, despite some weaker data releases this morning,” he said.
New York-based BlackRock, which oversees $4.3 trillion, is the world’s largest asset manager.
Rieder manages the $21.9 billion BlackRock Strategic Income Opportunities Fund and $3.6 billion BlackRock Total Return Bond Fund.
The yield on the 10-year Treasury fell as low as 1.865 percent in early U.S. trading before ending the day at 2.129 percent, down 8 basis points from late Tuesday.
Rieder said fair value of 10-year Treasuries is roughly between 2.65 percent to 2.75 percent, a trading range not seen since April.
For the remainder of the year, the 10-year yield will likely “drift higher again, but their cap is probably lower for now,” he said, in the 2.50 percent to 2.60 percent area.
In the intermediate term, the 10-year yield would approach 3 percent, he said.
Given the sharp drop in 10-year Treasuries yield, he characterized the high-yield, or junk bond, market as “more attractive” than earlier this year as its relative risk premiums versus Treasuries have increased.
He noted the junk bonds on average are yielding 6.5 percent more than 10-year Treasuries, compared with a yield spread of 5.0 percent.
The default rate for junk bonds “should still remain muted for the time being,” Rieder said.
As of Sept. 30, the BlackRock Strategic Income Opportunities Fund and the BlackRock Total Return Bond Fund held 4.2 percent and 3.7 percent of their assets in high-yield debt, respectively, data on the company’s website showed. (Reporting by Richard Leong)