Treasuries Bull Who Hit Jackpot Sees 10-Year Yield Falling to 2%

(Bloomberg) — Back in early March, Akira Takei had been positioned for Treasury yields to drop and the curve to steepen — a bet that looked like a long shot. Not anymore.

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The Asset Management One Co. fund manager saw his call vindicated Monday when two-year US yields plummeted the most in four decades due to worries about the collapse of Silicon Valley Bank. The rally in Treasuries has just begun, according to Tokyo-based Takei, who expects the Federal Reserve to stand pat next week and start cutting rates as early as July.

“The Fed’s rapid rate hikes for a short period of time have left SVB, banks and many others wounded,” said Takei, whose company oversees an equivalent of $460 billion. “The US economy has one foot in recession.”

Investors are racing to catch up with the fast changing Fed policy outlook as the US banking crisis erases wagers for a half-point hike at the March 22 decision. A report on American inflation due Tuesday is the next event risk for traders, as they try to gauge how Chair Jerome Powell will seek to tame price pressures without inflicting further damage on US lenders.

Takei is keeping a close eye on the gap between the federal funds rate and two-year Treasury yield as he notes that the US central bank has tended to stop tightening when rate increases resulted in an inversion.

Two-year US yields climbed 14 basis points to 4.12% Tuesday but remain more than 40 basis points below the fed funds rate.

Others are also predicting a policy pivot by the Fed. Goldman Sachs Group Inc. economists no longer expect the Fed to deliver a rate increase next week while Nomura Holdings Inc. is projecting a cut at the meeting.

Takei sees the 10-year US yield falling to 2% in the third quarter from around 3.55% now. Should the Fed be reluctant to lower the policy rate swiftly, “the bond market will demand it,” and the yield may fall much more than that, he said.