Bank of America: Payroll Data Justifies Higher 10-Yr Yields

Federal Reserve

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.

The 10-year note yields jumped to 2.73 percent on Friday in New York, a rise of 0.22 percent. The last time yields jumped at a similar level was August 2011. The 0.23 percent increase over the course of the week followed a 0.39 percent increase in the week ending June 21 of this year. A selloff of Treasury bonds and other fixed-income assets took place Friday. Higher yields go with lower prices for 10-year notes.

Andrew Brenner of National Alliance Capital Markets told The Wall Street Journal he sees tapering of QE far ahead of the suggested deadline of early- or mid-2014.

“Tapering in September is our view,” Brenner said on Friday. He remarked on the anxiety surrounding the $1 trillion invested in bonds since 2009. “Now the biggest problem is the massive amount of money that will flow out of bond funds,” Brenner added.

At the close of 2012, 10-year yields were at 1.76 percent. The highest point since the financial crisis was just over 4 percent, in April 2010.

Investing Insights: Will Recent News Affect HSBC?

More from The Cheat Sheet