The yield on the 10-year Treasury has popped from 1.7% in January to 2.4% after the positive May jobs report. The recent upward thrust is merely the beginning, said Kirk Barneby, portfolio manager for the Centre Active U.S. Treasury Fund. ‘If you simply look at the relationship between growth and nominal gross domestic product and the yield on the 10-year, it’s a very significant positive correlation over time,’ said Barneby. ‘So if we think about 2% real growth plus 2% inflation target assuming the Fed can engineer the economy smoothly to that 2% target rate of inflation that would imply a 4% rate of yield on the 10-year in longer term equilibrium.’ The Centre Active U.S. Treasury Fund utilizes U.S. Treasury securities only, seeking to take advantage of rate changes through active duration management and monthly rebalancing. The fund, which is down 26 basis points year-to-date and has a trailing 12-month yield of 0.49%, is not permanently bullish or bearish on government securities. It held $110 million at last check. As for reportedly heavy foreign buying in the U.S. Treasury market keeping a lid on rates due to nearly negative yields in Europe and Japan, Barneby said the impact has been overstated. ‘Foreign can have an impact at the margin, but foreign buying is not going to keep rates significantly below where longer term equilibrium, inflation and growth conditions suggest where they should be,’ said Barneby.
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