Last year, Trident had one of the more accurate predictions for 2012, estimating that the 10-year would decline to 1.50% by mid-year and remain there for the rest of the year, and the 30-year to decline to 2.75% by the end of the year. Rates haven’t quite ended that low, but they were right about the decline.
Bart Mosley, co-president of Trident, estimates that in the first quarter, 10-year Treasuries will move back up into the 2% range, and the 10-year triple-A municipal bond will be in the 1.95% range.
“By the end of the year, we think rates could be significantly higher,” Mosley said. “We’ll call it 3% on the Treasury, which puts us in a range of around 2.3% for the muni 10-year.”
Mosley said that the last couple of years have been relatively straightforward to form an interest rate and credit outlook for munis, but this year, it’s a much harder call.
“We basically have two sets of tensions driving things: the Fed’s ongoing accommodation versus the economy and actual inflation fears,” he said, adding that the tax exemption and budget talks are also factors. Those unknowns are as much psychology-driven as fundamental-driven, which makes it harder to have an outlook, Mosley said.
Loop Capital is also estimating an increase — albeit a smaller one— for this year. The firm projects the 30-year triple-A bond to start 2013 with a 2.60% yield, increasing by 10 bps each quarter to end the year at 2.90%.
The 10-year Treasury yield is estimated to be 1.65% in the first quarter and the 30-year to be 2.80%. By year-end, the yields are estimated to increase to 1.90% and 2.95%, respectively.
In a recent report, Loop Capital lists factors that would support higher rates, including the bond market’s long rally since March, consistent improvement in the housing market, high consumer confidence, perky auto sales and a rise in U.S. household wealth.
Factors that would support lower rates include the threat of sequestration which could cause a recession, the Federal Reserve’s commitment to buy long-term Treasuries each month, as well as mortgage-backed securities until unemployment rates fall, and Europe’s economic mess.
RBC Capital Markets is projecting a 10-year Treasury rate of between 1.6% and 2.2% next year, but the firm does not forecast muni rates, according to Chris Mauro, head of U.S. municipals strategy.