Citi Says 5.5% May Be Next Key Level for 30-Year Treasury Yield

72mba8kujyqauzi8y9mfu7ww_media_dl_1.png Bloomberg

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(Bloomberg) — Bond traders are zeroing in on 5.5% as the new “round number” for 30-year US Treasury yields as inflation concerns ripple across markets, according to Citigroup Inc.

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Jim McCormick, Citi’s London-based macro rates strategist, said the focus is likely to shift to this level after long-end yields climbed to 5.16% this week to approach the highest since 2007.

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“Investors’ calculus in terms of buying the dip on Treasuries has changed,” McCormick said in an interview in Singapore. Core inflation shows no signs of slowing, while US growth should outperform developed-market peers as the world’s largest economy is expected to weather the energy crisis better, he added. 

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The recent upward march in 30-year yields has upended the traditional notion that the 5% mark is the threshold which will attract dip buyers. Barclays Plc and BNP Paribas SA have cautioned the selloff may not be over, as elevated energy prices continue to boost inflation expectations.

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All this has led investors to recalibrate their expectations for the monetary policy outlook. Swap markets show that traders are pricing in a 25-basis point rate hike from the Federal Reserve by March 2027 to damp price pressures, compared with bets for rate cuts before the Iran war broke out in late February. 

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“I see markets underpricing the risk of a Fed rate hike starting this year,” said McCormick.

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The repricing in inflation expectations has been felt across the globe. Germany’s 30-year yield rose to a 15-year high this week, while the yield on similar-dated Japanese notes advanced to the highest level since the maturity was first sold in 1999. In the UK, worries about the fiscal implications of a leadership challenge to Prime Minister Keir Starmer remain top of investors’ minds. 

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And while risk assets have rebounded despite the ongoing Iran war, with a MSCI gauge of developed-market equities having climbed over 10% from a low reached in March, there are growing worries that elevated risk-free rates could upend the rally at some point. 

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“The biggest risk to the global economy is the size of the shock to global bond yields,” McCormick said. “If long-dated US yields continue to march higher, it creates a pretty unstable equilibrium for riskier assets such as equities and credit.”

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