(Bloomberg) — In early March, Akira Takei was positioned to slow Treasury yields and flatten the curve — a bet that looked like a long shot. not anymore.
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Fund managers at Asset Management One Company got their calls right on Monday when US two-year yields fell the most in four decades on concerns about the collapse of Silicon Valley banks. The rally in Treasuries has just begun, according to the Tokyo-based techie, who expects the Federal Reserve to stand pat next week and begin cutting rates in early July.
“Rapid rate hikes by the Fed over a short period of time have hurt SVBs, banks and many others,” said Takei, whose company oversees the equivalent of $460 billion. “The US economy has one leg in recession.”
Investors are racing to catch the rapidly changing Fed policy outlook as the US banking crisis wipes out bets on a March 22 decision for a half-point hike. A report on US inflation on Tuesday is the next event for traders to risk, as they try to predict whether Chair Jerome Powell will try to ease pricing pressure without further hurting US lenders.
Takei is keeping a close eye on the differential between the federal funds rate and the two-year Treasury yield as he notes that the US central bank has stopped tightening when the rate hike reversed.
The two-year US yield climbed 14 basis points to 4.12% on Tuesday, but remained more than 40 basis points below the fed funds rate.
Others are also predicting a policy pivot by the Fed. Goldman Sachs Group Inc. U.S. economists no longer expect the Fed to raise rates next week, while Nomura Holdings Inc. Anticipating the cut in the meeting.
Takei sees the 10-year US yield declining from about 3.55% to 2% in the third quarter. Should the Fed be reluctant to reduce the policy rate sharply, “the bond market will demand it,” and yields could fall much further than that, he said.
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