See 10-yr US treasury yield at 3.25% by Dec: Benoit Anne

Benoit Anne, MD and Head-Emerging Market Strategy, Societe General expects 10 year US Treasury bond yield to rise to 3.25 percent by year end.

"We are very bullish on the US economy in the latter part of the year and that is why we are calling for this US treasury yields going to 3.25 percent," Anne told CNBC-TV18 in an interview.
He expects FII fund outflow to continue from emerging market like India until there is any significant revival in growth.  Also read: Bonds mkt more attractive than equity at this point: HSBC
"Let us not forget we are still dealing with a China situation, which is a big risk, and then I think we can't really be reservedly bullish on equities and bullish on currencies," Anne said. Below is the verbatim transcript of the interview Q: I am more interested in your view on the Indian markets after the kind of Reserve Bank changes that we saw on the currency overnight. But before that just one point on the global market set up, which continues to see day after day of record highs of the US markets. What is your prognosis going ahead?
A: What we are seeing here is a bit of a short-term relief in the global markets including in global emerging markets after the soft data coming out of the US and the retail sales number in America was on the soft side and that has helped contain the risk of a correction in US treasuries and that is viewed as a risk-on signal for now. So, a bit of a short-term relief and you are right the big movers over the past couple of days have been the India and what is happening over there, a big move and a big signal on the part of the authorities here to try to contain the depreciation pressures. Q: How do you expect as an investor funds to react? Will you see a stoppage of inflows into Indian equities or would you even see a pullout?
A: Yes we are still in a capital outflows mode right now. Strategically, I think the big picture has not changed. We are now calling for 3.25 percent for the 10 year treasury by year end. So, a substantial move here and that means correction is still very much on the agenda. Q: Did you say 3.25 percent?
A: Yes for the 10 year US treasury. Q: For the Indian market or rather for emerging markets how do you see the move play out now because there is so much talk about hike in rates perhaps that the Reserve Bank in India might come out with and we have seen that happen in emerging markets across the board because of the slump in emerging market currencies. Do you foresee something like that in the Indian markets as well, a hike in rates soon?
A: We already have this unofficial hike. What the Reserve Bank of India (RBI) did was to really contain liquidity here and there was a strong signal and it has done the job for now. I think what it tells investors is the RBI is now a bit more serious about stepping up the policy response and with the benefit of inside, 60 is going to be a very difficult level to break now for INR, as I see INR moving from 58 to 60 with a big message here being further depreciation risks are now being contained. Q: So how do you expect funds to behave - debt funds and equity funds?
A: I think it is a bit early to turn bullish on global emerging markets again because ultimately what you need to watch is a growth picture and we are seeing maybe some signs of not so bad data in some places, but overall the risk to the growth picture. It is still skewed to the downside. So, until you get growth back on track across global emerging markets and let us not forget we are still dealing with a China situation, which is a big risk, then I think we can’t really be reservedly bullish on equities and bullish on currencies. Q: Specifically Ben Bernanke would face some grilling shortly. What do you expect? What will you watch out for? And how might markets react you think?
A: This is really the big focus here. What the Fed says and more importantly what the US data are telling us at this point. We are very bullish on the US economy in the latter part of the year and that is why we are calling for this US treasury yields going to 3.25 percent and that is to me the main item to watch. Q: That would mean a pullout of emerging markets perhaps. We did see USD 7.5 billion go out of the Indian markets in the month of June – both in equity as well as in debt. Do you foresee something like that in the months to come as well because of this move that you are expecting in the US 10 year?
A: Yes, I am still bearish in terms of the outlook for capital flows. We are still in outflows mode. What have established is the long only traditional asset managers have not sold their emerging market (EM) exposures aggressively yet and positioning continues to be quite high in EMs, so that is a big risk.