(Bloomberg) — The US 30-year yield has scope to reach 6% as this month’s Treasury market selloff has yet to price in the risk of a sustained increase in productivity growth, the head of US rates research at Barclays Capital said in a report.
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Markets “continue to assume that today’s elevated neutral rate will ultimately prove cyclical rather than secular,” Anshul Pradhan wrote. In the cyclical framework, investors expect the Federal Reserve to raise interest rates to quell inflation but “do not view that increase as permanent.”
The main bearish risk to that view is “a more productive economy,” Pradhan writes. Spending by US technology giants this year on artificial intelligence infrastructure is projected to rival their combined spending over the past three years.
If the result is a sustained acceleration in productivity growth, “the Fed would have less reason to return policy rates to the levels currently embedded in the forward curve,” and investors “would need to revise up where policy ultimately settles, pushing long-dated yields higher,” the report says.
“All else equal, a repricing of long-run estimates higher to short-run ones would over time push the fair value of 30y yields to 6%,” a level last exceeded in June 2000.
The US 30-year yield topped 5.61% Monday for the first time since 2002, and has risen by a full percentage point from this year’s low on March 2.
On the other hand, Treasuries can rally if the capital spending boom moderates, leading to slower growth and giving the Fed “less reason to keep rates elevated,” Pradhan wrote. The intermediate sectors of the Treasury market would benefit most in that case, he said.
A third possible scenario involves investors “demanding greater compensation to hold Treasury debt as higher yields worsen the fiscal outlook through rising interest costs,” the report says. Like the bearish case, that “would place the greatest pressure on 10- to 30-year yields.”
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