Bank of America Corp. (NYSE:BAC) took one look at the latest payroll data and saw higher yields in the cards. BofA’s Merrill Lynch raised its forecast for 10-year Treasury yields to 3 percent for the year’s end, a move that acknowledges the latest jobs report is expected to affect the Federal Reserve’s bond-buying program. BofA is a primary dealer with the Fed.
The Merrill Lynch report was released Friday, after employment data showed 195,000 new jobs, better than forecasts by analysts ahead of the report. The good news for the economy spelled bad news for investors who fear the Fed’s quantitative easing will end before markets have stabilized. Ben Bernanke sad the Fed’s QE program will not cease before the proper time, yet markets have focused strictly on the possibility of less bond-buying in the near future.
BofA’s previous forecast for 10-year Treasury yields was 2.4 percent (the forecast was made in early June). According to Bloomberg, speculation about foreign governments liquidating dollar reserves, plus the impact of mortgage-backed security hedging and an increase in Japanese securities yields, contributed to the new BofA forecast. The markets responded accordingly, with the biggest increase in bond yields in nearly two years.