(Bloomberg) — As US Treasury traders debate whether the 30-year yield will mount a sustained push past 5%, one market veteran is pushing a far bolder wager.
Steven Barrow, head of G10 strategy at Standard Bank in London, predicts the 10-year yield will hit 5% this year because of persistent inflation. Besides a couple hours of frenetic trading in October 2023, it’s a level the US benchmark bond rate hasn’t surpassed since 2007. It’s also more than 80 basis points above the average year-end estimate of strategists surveyed by Bloomberg.
The disruption to global energy markets caused by the war in the Middle East has reignited inflation concerns, making Barrow’s 5% yield prediction — which he made earlier this year — more plausible, if still far from consensus.
“The view has not been dictated by the war. It’s just been enhanced by the war,” Barrow said via telephone. “The Fed is probably going to keep policy too easy, structural inflationary pressures are rising, and I don’t think the government is going to do anything about the budget side.”
The 10-year rate traded around 4.46% on Tuesday, compared to 3.94% before the US and Israel’s attacks on Iran in late February. Bringing down the benchmark rate has been a key sticking point for the Trump administration and Treasury Secretary Scott Bessent.
US Treasuries, alongside other bond markets, have been battered by the surge in energy prices due to the conflict in the Middle East. That risks feeding through to other parts of the economy, and is driving up market gauges of inflation risk. A break above 5% would fuel debt sustainability concerns, pressure global corporate borrowing costs and risk spurring a rotation away from stocks.
Even so, a 5% yield in the benchmark US bond would require a much-larger selloff. It’s a threshold that carries psychological importance for traders, with 30-year bonds often attracting dip buyers when they trade around that level. The 10-year, meanwhile, has failed to eclipse 4.5% so far this year.
“Most people are just assuming what has happened is going to continue to happen,” Barrow said of the recent range of Treasury rates. “The fact that the market’s been able to hold onto the 4.5% yield, and we’ve not really gone up to 5% sustainably for any period of time, doesn’t mean that we can’t do so in the future.”
Barrow, who has four decades of experience as a strategist, said his bearish bond call reflects a years-long focus on supply-side inflationary pressures. He cites an array of factors including global supply-chain squeezes, the ongoing impact of climate change, and tighter immigration policy limiting labor supply as fueling higher consumer prices — and with them, Treasury yields.
His contrarian status might reflect the fact he works alone, rather than as part of a large division of strategists, Barrow said.
“I’ve worked in big research groups and sometimes you have a two-hour argument about moving a forecast,” he said, adding that it can contribute to an “averaging bias” that avoids bold calls. “There’s often a lot of flat-line forecasting.”
Barrow’s bearish call on Treasuries in 2021 proved prescient as a resurgent economy drove yields higher. He has also made successful forecasts on the US dollar and British pound in recent years, though has been caught out by the Japanese yen’s persistent weakness.
One argument floated by bond bulls and some policymakers is that artificial intelligence will transform the US economy, boosting productivity and justifying easier monetary policy. Barrow’s skeptical.
“Maybe it’s because I’m a bit long in the tooth, but having lived through a number of these miracle, productivity-enhancing technological developments — which have actually not really done a great deal — I’m a little bit loath to read too much into it,” he said.
More stories like this are available on bloomberg.com
