PGIM Fixed Income sees 10-year Treasury yield falling to 2.5 percent: CIO

By Tomo Uetake

TOKYO (Reuters) – PGIM Fixed Income, an asset-management arm of insurer Prudential Financial (N:), sees the yield on the U.S. benchmark 10-year Treasury note falling to 2.5 percent in the longer term, its investment chief said on Wednesday.

Chief Investment Officer Mike Lillard also said that, following Tuesday’s mid-term elections, he expected the U.S. fiscal deficit to widen further and trade and tariff tensions to carry on rising.

In contrast to many market professionals, Lillard said longer-term U.S. interest rates appeared to be on the very high rather than the low side.

“If you look at U.S. Treasuries relative to where they have been for the last 150 years, 3 percent doesn’t look that low,” he told Reuters.

He called the three decades between the late-1960s and early-2000s, during which nominal 10-year yields were consistently above 5 percent, a demographically driven anomaly.

At current yield levels, with 10-year Treasuries around 3.25 percent, “we’re better buyers than sellers” of debt securities, Lillard, responsible for $716 billion of assets that PGIM Fixed Income manages, said.

The benchmark yield , which rose to a 7-1/2-year high of 3.26 percent in early October, was trading at around 3.20 percent on Wednesday.

“Our view for the 10-year U.S. treasury is that over the long run, that number should be about 2.5 percent.” he said.

As regards the outlook for the Fed funds rate, PGIM anticipates that, as well as a widely-expected December rate increase, the Federal Reserve will raise rates three or four times in 2019 and potentially two to three times the year after, if the U.S. economy remains as strong as it is.

“This would get the Fed funds rate to about 4 percent by the end of 2020. Our concern is that the rate is much too high,” he said.

“The stimulus package in the U.S. will be wearing off by then. This gives us pause and we believe there’s a significant chance of a recession at the end of 2020.”

Within the fixed income universe, PGIM believes high-quality structured products such as the top-rated collateralized loan obligations (CLOs) – securities backed by a pool of debt – are currently the most attractive defensive assets.

No highest rated CLO tranches experienced a default even during the global financial crisis, the Newark-based investment chief said.

“We think those triple-A structured products are a great place to invest money… while we wait for a better opportunity.”

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