LIVE MARKETS-Treasury yields may fall with more clarity on US budget

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TREASURY YIELDS MAY FALL WITH MORE CLARITY ON U.S. BUDGET

Treasury yields have risen as trade deals boost risk sentiment, but they could fall back when there is greater clarity on fiscal issues including the U.S. budget and tax plan, according to Barclays Capital.

The benchmark 10-year Treasury yield reached 4.55% on Thursday, its highest since April 11.

“The sell-off was not out of line with other bond markets, and the yield curve did not steepen, suggesting that the key driver was still the improvement in global sentiment following the deal,” Barclays analysts including Anshul Pradhan said in a report.

The U.S. and China agreed last weekend to slash steep tariffs for at least 90 days, tapping the brakes on a trade war between the world's two biggest economies that had fed fears of a global recession.

With trade policy now taking up less market focus, investors are watching fiscal developments. Here, Barclays sees an improving, if still challenging, outlook.

“We believe that tariff revenues go a long way in helping the fiscal profile, particularly as it looks likely that they are here to stay. Compared with a simple extension of the expiring tax cuts, the cost of new tax cuts even if made permanent would be offset by higher tariff revenues and some spending cuts,” the analysts said.

“Hence, the fiscal outlook, while perhaps worse from a week ago, is still better than from earlier in the year,” they said. “As clarity on fiscal policies arises, we expect long-term yields to decline as some off the uncertainty premium abates.”

Barclays expects two-year US2YT=RR and 10-year US10YT=RR Treasury yields to decline to 3.7% and 4.2%, respectively. They were at 3.97% and 4.43% on Friday.

The bank also recommends going long five-year Treasuries US5YT=RR with the yield around 4.10% and entering flattening trades between 10-year notes and 30-year bonds, “to position for a deeper cutting cycle and reduction in the long-end term premium.”

(Karen Brettell)

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