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BofA’s Braizinha Sees Return to Falling U.S. Yields Through 2019

Vivien Lou Chen

(Bloomberg) -- Treasury yields are poised to fall into year-end amid lingering trade friction, global economic weakness and the U.K’s pending exit from the European Union, according to Bruno Braizinha at Bank of America Corp.

The director of U.S. rates strategy spoke after the Federal Reserve delivered a second straight rate cut without committing to further easing this year or next. Futures traders are still banking on another quarter-point easing in 2019 and further reductions next year, and Treasury yields declined Thursday for a fourth straight day.

“The balance of risks is clearly negative and nothing’s really changed after the Federal Reserve’s meeting,” Braizinha said Wednesday. “The next couple of months will be quite critical,” and the domestic data will determine whether the anticipated drop in yields goes from “a slow grind” to a more abrupt drop as seen last month.

Bank of America expects both the 2- and 10-year yields to end the year around 1.25%, compared with about 1.75% and 1.78%, respectively, on Thursday. That would mean the yield curve between the maturities would be on the brink of inversion, a potential sign of market concern that the probability of a recession is growing.

Braizinha predicts that U.S. rates will end up joining the rest of the developed world around zero by the end of 2020, a view he previously spoke about in June, when the benchmark 10-year yield hovered above 2%.

Around six weeks later as the trade war escalated, Treasuries began a historic rally that pushed the 10-year yield to a three-year low of 1.43% and the 30-year yield to an all-time low of 1.9%.

But yields have pulled back from those lows on stronger-than-expected data that buoyed confidence in the economic expansion, though they’ve drifted lower again this week. A divided Fed that didn’t clearly signal additional easing led to a flatter curve and put the bond market back on inversion watch.

“The market clearly expects more meaningful deterioration in fundamentals going forward,” Braizinha said. Fed officials “were and are still behind the curve and, in fact, may have left themselves even further behind in the sense that they don’t think more rate cuts are needed for this year or next.”

If U.S. fourth-quarter data turn solidly weaker, particularly payrolls, retail sales and consumer sentiment, it would raise the likelihood of a synchronized economic slowdown and a repeat of August’s steep decline in yields, he said.

Even without signs of U.S. economic weakening, a souring global outlook, the trade war and Brexit will guide yields lower, he said.

It will take more than poor global momentum to re-create an August-like plunge, for Braizinha.

“Deterioration of the global outlook is passing the baton to U.S. fundamentals, and it’s up to U.S. fundamentals now to justify lower yields from here.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Dave Liedtka

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