Investors should get used to U.S. Treasury yields rising toward 4% as the 30-year bull market in bonds comes to an end, according to Jim O’Neill, former chairman of Goldman Sachs Asset Management.
“It’s all part of this big normalization that’s going to happen,” O’Neill said in an interview in London today. “In the process, there could be quite ugly days.”
The benchmark 10-year Treasury yield slipped 0.02 percentage point to 2.19% at 2:50 p.m. New York time. It earlier climbed to 2.29%, the highest since April 2012 and up from a record-low 1.38% on July 25.
Ten-year yields, which were last above 4% in April 2010, may reach that level “not next week, but in the next couple of years if the U.S. is getting back to normality,” O’Neill said.
The global economy is “in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair” with bonds, O’Neill said earlier in an interview on Bloomberg Television’s “On The Move” with Mark Barton.
The Federal Reserve is buying $85 billion of Treasuries and mortgage securities each month to support the world’s largest economy by putting downward pressure on borrowing costs. Speculation the central bank may taper its debt purchases in the coming months may damp demand for emerging-market bonds, as well as U.S. debt, said O’Neill.
“When the game starts to change with central banks, it is inevitable bonds are going to suffer,” he said. “If we see U.S. bond yields rising further and more and more people thinking about the Fed tapering, you’re going to see some further reaction in many, many emerging markets, particularly where there’s current account deficits.”
O’Neill, 56, stepped down this year as chairman of Goldman’s asset-management division, a post he has held since 2010. He joined the company in 1995 as a partner, became head of global economics, commodities and strategy research in 2001 and was added to the European management committee in 2006.
India is the weakest of the so-called BRIC group of emerging economies, which includes Brazil, India and China, and the nation’s democracy sometimes “smothers” decision making, O’Neill said. The rupee touched a record low of 58.9850 per dollar today.
O’Neill said he would buy Bangladesh assets over their Indonesian counterparts, speaking at the Bangladesh Investment Summit in London today.
Turkey is at risk due to the global bond selloff because of its current-account deficit, said O’Neill. Anti-government protests in the country may have wider significance for countries in the Middle East looking to Turkey’s democracy as an example.
“For the sake of many places beyond Turkey, it would be good to see an end to this trouble,” said O’Neill, who is a contributor to Bloomberg View. “Even without the trouble going on in Istanbul and other urban areas, Turkey would have been vulnerable.”
There is still value in assets from China as well as so- called peripheral euro-area nations, O’Neill said. The safest bonds may become less fashionable, he said.
“If the U.S. is returning to normality, which I have suspected for a while it is, and the Fed starts to change its own view about that then at some point, we have to get used to the notion of U.S. bonds being closer to 4% than 2,” O’Neill said.
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