Ten-year Treasury yields will end the year at 2.25 percent, according to LaVorgna, whose company is another primary dealer.
Moves by the European Central Bank to prevent the breakup of the euro allow the Fed to concentrate more on growth, Carsten Brzeski, a senior economist at ING Group in Brussels, said in a Sept. 6 interview. ECB President Mario Draghi said that day policy makers agreed to an unlimited bond-purchase program to contain rising yields in the euro area and fight speculation that Greece might leave the 17-nation currency.
“It does enable the Fed to focus more on its domestic issues: the economy, the labor market and the potential fiscal cliff,” Brzeski said, referring to tax increases and spending cuts of $1.2 trillion over a decade that would begin if Congress fails to agree by Dec. 31 on ways to reduce the deficit.
Republicans unhappy with Bernanke’s stimulus actions called for an audit of the Fed in their 2012 platform adopted in Tampa Aug. 28. Senator Bob Corker of Tennessee said in a press release Sept. 6 that an “unhealthy obsession” with monetary policy is distracting the public from the need for fiscal reform.
U.S. GDP will expand 2.2 percent this year and 2.1 percent in 2013 according to median forecasts compiled by Bloomberg. Morgan Stanley cut its 2012 global growth forecast to 3.2 percent from 3.7 percent according to an Aug. 15 report, and the ECB on Sept. 6 said euro area output will contract 0.4 percent this year, worse than the 0.1 percent it had predicted three months earlier.
Two-year Treasury yields ended last week at 0.25 percent, or 0.4 percentage point below the 0.65 percent for five-year notes. The two-year yield was 0.24 percent today. The gap has narrowed from a peak this year of 81 basis points in March as signs the recovery was slowing caused traders to expect low money market rates to persist for several years.
“What the Fed and the ECB are trying to do is damp volatility,” Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said Sept. 7 in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Central banks are in the business now of keeping yields low for a very long time.”
Gross said he is seeking to bolster returns by capitalizing on the likely decrease in bond price swings.
His $270 billion Total Return Fund gained 8 percent during the past year, beating 97 percent of its peers, according to data compiled by Bloomberg. The fund rose 0.4 percent in the past month, topping 85 percent of comparable funds.
“Nervousness and continued agony over in Europe, the fiscal cliff, election uncertainty means there are a lot of headwinds,” said Mark MacQueen, partner and money manager at Austin, Texas-based Sage Advisory Services Ltd., which oversees $10 billion. “Everything is lining up to be more difficult. The Fed will give us language that reassures the market they intend on doing more.”