The rally in U.S. Treasurys that pushed 10-year yields to their lowest level in nearly seven months reflects the likelihood that the Federal Reserve will keep rates low in a slowly growing global economy, according to Bill Gross, chief investment officer at Pimco.
The 10-year note 10_YEAR +0.60% yield, which falls as bond prices rise, dropped more than 15 basis points to 2.50% in the past three sessions. That move is emblematic of the way interest rates should behave as the world shifts toward the “new neutral” paradigmoutlined by Pimco earlier this week, the bond market veteran told MarketWatch in emailed comments.
“2.50% currently reflects a 0.5% new neutral rate and seems fair for now,” Gross said.
The new-neutral outlook published by Gross and Pimco adviser Richard Clarida suggests that the global economy is transforming from a period of recovery after the financial crisis — termed the “new normal” back in 2009 — toward stability that is characterized by modest economic growth over the next three-to-five years.
With economies expanding more slowly than they did prior to the financial crisis, central banks are likely to keep their key interest rates low, cushioning lending rates from a sharp rise. In the U.S., the fed funds rate is currently anchored near zero, with many traders expecting it to begin rising in the middle of next year . But Gross suggested yields will be dictated by how high the Fed eventually hikes rates. It may stop at a lower point than it did in past rate cycles.
