(Bloomberg) -- Treasury two-year yields may slide to 1% by the end of 2020 as the Federal Reserve makes a succession of interest-rate cuts to counter slowing growth, according to Citigroup Inc (NYSE:C).
“We’re at a point where we’re weighing whether the Fed will cut for insurance or if they’re entering a period of structural, cyclical downturn in interest rates -- I’m leaning more towards the latter,” said Shyam Devani, senior technical strategist in Singapore. “I wouldn’t be surprised if we see two-year yields dropping to 1% by the end of next year.”
Citigroup is forecasting the Fed will lower its benchmark rate by 25 basis points this month and potentially cut another two times by year-end. “Inflation expectations remain low, we have a global slowdown in growth and commodity prices remain weak,” Devani said. “The Fed could cut well into next year.”
Traders increased bets on how much the Fed will cut rates to bolster U.S. growth following Chairman Jerome Powell’s dovish testimony to Congress on Wednesday. Markets are now pricing in about 75 basis points of easing by year-end after Powell cited slowing global expansion and trade tensions as threats to the U.S. economy.
Powell’s comments spurred a rally in shorter-maturity Treasuries. Two-year yields dropped two basis points to 1.81% in Asian trading after sliding eight basis points on Wednesday.
Here’s what other market participants are saying:
Flatter Curve (DBS Bank)
Treasury yield curve may flatten ahead of Fed’s July meeting as markets are already more than fully priced for an “insurance” rate cut. “I’m biased toward some flattening” in the 2-10 year part of the U.S. yield curve, said Eugene Leow, rates strategist in Singapore
Greenback Winner ( State Street (NYSE:STT))
The dollar could climb even after the Fed cuts as investors may start to cover underweight positions. “All the roads point to one result: that the dollar could possibly be the sole winner,” said Bart Wakabayashi, branch manager in Tokyo
Avoiding Panic (Commerzbank (DE:CBKG))
“A 50bps cut would smack a bit too much of panic,” said Bernd Weidensteiner, economist in Frankfurt. “After the release of a rather strong employment report on Friday, a large step is unlikely”
Dollar Gain (RBC Capital Markets)
“The dollar would remain as G-10’s highest yielder and that should lend support to dollar in a low vol/carry-obsessed world,” said Daria Parkhomenko, FX strategist in New York