Halister News

(Bloomberg) -- Benchmark 10-year Treasury yields should rise to between 2.5% and 3% in 2018, boosted by uncertainty over policy style of next Federal Reserve chair and low odds of another recession worldwide, says Paul Donovan, global chief economist for UBS Wealth Management.

• “Veneer of uncertainty” over next Fed chair is pushing yields higher, Donovan says in telephone interview from Los Angeles
  • NOTE: 10Y yields broke through key level of 2.4% this week, see related story on whether that move might continue
• 2.4% mark for 10Y yields is “a psychological barrier that’s not that significant in reality” and is “short-term noise in the markets,” Donovan says
  • 10Y yields significantly below their economic value of 4.5%-5%, where they would normally be in a “perfect world” 
• UBS Wealth doesn’t have a final pick for Fed chair in mind; Donovan says Yellen has been a “competent, reputable chief of the Fed and having continuity at the Fed would be very appropriate” 
  • “She’s been flexible in her approach -- dovish when needed and she also would be hawkish if needed”; Jerome Powell “would be a good alternative” to Yellen
  • “If the next Fed chair is not Yellen, there’s potential for lingering uncertainty about the Fed’s monetary policy style that may keep yields elevated”
  • NOTE: Yellen Out of Fed Chair Race, One Source Tells Politico
• “There’s very little chance of a recession next year” caused by central bankers tightening too much or economies overheating; however, if policy makers make the mistake of tightening too aggressively, that may lead to a significant downturn in 2019
  • Fed will probably raise interest rates by a quarter-point in December and again next year
• “We are still in a risk-on environment, with reasonable economic growth and a very, very low chance of recession” worldwide, which “provides a degree of support to investors who wonder whether they should have a certain amount of risk in their portfolio”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Brian Chappatta