“The sources of higher interest yields include higher economic growth, increasing inflation expectations and reduced Fed demand. While one of those three might come into play in 2013 or 2014, it is very unlikely that all three do,” said LeBas, who predicts the 10-year note yield will end the year at about 2.2 percent.
While the U.S. pulled out of its worst economic downturn since the Great Depression during Obama’s first term, unemployment has remained higher than the average of 6.8% over the past 10 years.
Average weekly earnings adjusted for inflation showed no gain in 2012, and the unemployment rate in January rose to 7.9% from 7.8% the month before. The economy unexpectedly shrank by 0.1% in the fourth quarter.
For the three years following the recession that ended in June 2009, the jobless rate averaged 9.2% and growth after accounting for inflation averaged 2.3%, Robert Pollin, a professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst, said in a telephone interview on Feb. 12. That compares to average unemployment of 6.3% and real GDP expansion of 4.5% for the three-year periods following the end of the previous eight recessions.
“You’ve got strong headwinds every way you look working against returning to the kind of economic growth levels we saw pre-2007,” Alan Wilde, head of fixed-income and currencies in London at Baring Asset Management, which oversees $53 billion, said in a telephone interview on Feb. 12.
“The idea that bond yields could return to 4% to 5%, with a nominal growth rate compatible with stable employment, is still some way off,” he said. “I subscribe to the gently rising scheme of things for Treasury yields rather than a rapid burst higher.”
Implied yields may be below Congressional Budget Office estimates in part because the so-called term premium required by investors to hold longer-maturity debt has remained around record lows, and negative since 2011, amid Fed purchases. A negative term premium means investors are not requiring any excess return to hold long-term debt instead of rolling over a series of short-term securities as they mature.
“We can’t take market implied forward rates today at face value due to the Fed’s quantitative easing,” Zach Pandl, an interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion said in a telephone interview on Feb. 15. These rates “are related to expectations about where the economy and monetary policy is going, but central banks are deliberately distorting those rates to stimulate recovery.”
The premium was minus 0.62% last week, up from a record low of minus 1.0187% on July 24. It averaged 0.916% in the decade before the start of the financial crisis in 2007.