(Bloomberg) -- The bond market is too sanguine about the US fiscal picture, Barclays strategists said in an annual outlook released Thursday.
“Current yield levels are not fully reflecting the adverse fiscal dynamics, which may be worth 50-75bp on long-term yields,” rate strategists and economists led by Anshul Pradhan and Marc Giannoni, respectively, wrote in the report.
Long-term rates incorporate the expected path of Federal Reserve monetary policy and term premium, and “a structurally wide budget deficit can raise both,” they wrote.
Still, Barclays expects the 10-year Treasury yield to end 2024 at 4.25%, about 20 basis points lower than current levels, as economic growth slows globally. The consensus view has the rate pegged closer to 3.75%, however.
“Fiscal worries are going to be a headwind for the bond markets,” Pradhan said on a Thursday call with reporters accompanying the release of the report. If forced to choose, he’d sell, not buy, 10-year notes, he said. Barclays has an open trade recommendation to short the front-end of the Treasury curve.