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Yield on 10-year Treasury note is still expected to be 2.5% at year-end, says Swiss Re Chief Economist, Kurt Karl

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Swiss Re’s Chief Economist, Kurt Karl, commented that expected decreases in purchases of Treasuries will keep yields on the 10-year Treasury note close to 2.5% through year-end.

Kurt Karl commented: “The tapering off of purchases of assets, including US Treasuries is likely to start late this year and end by the middle of 2014. This will be supportive of our forecast of yields on the 10-year Treasury note to be at 2.5% by end-2013 and 3.0% by year-end 2014.”

He continued that Real Gross Domestic Product growth, particularly in the current quarter, will be restrained by the sequestration budget cuts. In the fourth quarter growth is expected to regain its strength from housing construction, consumer spending and an improved investment environment. In the short term, yields on the 10-year T-note will likely decline before recovering to reach 2.5% again by year end.

He further added: “The modest improvement in Euro Area economic indicators continued in June, with the Purchasing Managers’ Indices generally rising. Still, the PMIs for both services and manufacturing remain below 50, implying a slight contraction in the economy. Nevertheless, the better indicators imply that growth will resume soon and continue to improve next year, which is our baseline forecast. Our year-end forecast for the 10-year yield is 1.7% in Germany. Recent survey indicators for the UK economy have been encouraging. The manufacturing PMI has risen more than four points to 52.5 since February this year, while the services PMI is up 8 points from its lows late last year and now stands at a robust 56.9. Yields on the 10-year gilts are projected to be 2.5% by end-2013.”

He continued that the Bank of England and the European Central Bank, given the worries about monetary tightening in the US, have sought to reassure markets that no tightening is being contemplated for Europe.

He also said: “In Asia, Japan is set to expand this year now that the yen has weakened. China, however, has become a concern due to a decline in expected growth and interbank rate volatility. The turmoil in the Chinese interbank market suggests a change in policy mindset, reflecting policymakers’ firmer stance towards credit expansion. Thus, we have lowered China’s GDP forecast to 7.5% and 7.8% for 2013 and 2014 from 7.8% and 8.0% respectively. There is a risk that – in a downside scenario – efforts to rein in credit growth could lead to a surge of loan defaults and trigger a sharp economic slowdown. “