Fed may hike, but US Treasury yields are going to drop, HSBC says

If central banks ever get around to hiking interest rates, they will do so only very slowly, one of the world’s largest brokers predicted on Thursday.

In fact, almost regardless of what official rates in the US do, long-term market rates are headed lower, Steven Major at HSBC said in a research report sent to clients.

Major predicted the yield on the benchmark 10-year US Treasury note would end 2015 at 2.1% and fall to 1.5% towards the end of 2016, despite the risk of the US FOMC hiking rates in December.

Those forecasts were 38 and 153 basis points less, respectively, than expected by the Bloomberg consensus.

“We recognise that the risk of a December hike remains but the bond’s valuation is also a function of what happens afterwards.”

Major also saw the European Central Bank stuck in easing mode “well beyond” the end of 2016. The ECB would be forced to increase its easing plans, with its looser policy expected to weigh not only on euro area yields but also on those Stateside.

The strategist made a ‘neutral’ call on emerging market fixed income, saying it was cautious on countries including Brazil, Malaysia, South Africa, Turkey and Russia due to their negative rating trajectories, but looking at names such as Korea, India and Hungary revealed “a more positive story”.

Lastly, it was time to buy short-dated inflation linked debt across all the major markets: the US, Eurozone and UK, the strategist said.

"Our bullish shift is not driven by signals that inflation is rebounding – far from it – but because the sell-off has taken prices to attractive levels."