And Now For The First Gloomy Economic Outlook - Deutsche Bank's 2011 Fixed Income Forecast

Tyler Durden's picture

There is more to Deutsche Bank than just that douchey joke of an economist who appears on CNBC every other day to repeat that the November NFP number was irrelevant (incidentally we agree, simply because everything out of the BLS now has the same trustworthiness as Chinese data, and the November number was politically motivated to pass the UI extension) and who changes his story diametrically and on a daily basis, with every incremental piece of economic data that does not fit his amateur theories. Deutsche Bank has always had a very decent fixed income platform, and we are happy to announce that in reading the firm's 2011 FI forecast we encounter not only views that diametrically oppose those of the aforementioned hack (for which alone the report is worth reading), but also has some very detailed and insightful observations (which we are confident David Rosenberg would agree with wholeheartedly). The report's summary: bonds may drop a little more, then surge once it becomes clear the economy is as scroomed as always. And another interesting observation, which has to the do with ending the 10s30s flattener trade. We tend to agree with that as well. Having almost penetrated 100 bps today, the second retest proved unsuccessful, and the time for a steeper long-end is coming (primarily due to a renormalization of the curve), and a flattening of the 2s10s.

2011 Outlook – Higher Yields Are Not Sustainable

  • 2010 was a story of expecting low rates, for a long time. We think 2011 will be divided into two halves. The first half represents a test of the low for long view. Is the economy gaining sufficient traction that rates can begin some kind of steady normalization? The second half will be the answer. We think that answer is a resounding no – low for long will come back into vogue. The market will re rally and once again disappoint the economy optimists.
  • It is not that the economy isn’t getting better – it is. Instead it is that there are so many headwinds to work through, that recovery is not consistent with premature monetary tightening by either the Fed or the markets. Fiscal stimulus buys time in 2011 but little else. Ironically the stronger growth looks, the more likely fiscal tightening will come into play sooner keeping the recovery on a
  • We are closing our 10s30s pain trade flattener. It worked well to protect against a post QE Fed disappointment trade. We feel that this disappointment trade may have a little further to run but the bulk of the move is behind us. We think it is too early to go long duration again but expect to build a new long upwards from 3.35 percent.
  • We are also closing our long swap spread trade. This has benefited also from the pain trade and convexity paying. Prospective corporate issuance in early 2011 as well as the surprise fiscal stimulus bodes well for some re narrowing.
  • TIPS offer value in the front end out to five years. This is as much due to the fact that breakevens are very low and near term technical factors that can elevate CPI, at least temporarily.

Some notable observations on QE:

The Fed’s QE program is designed to cut through a potentially negative dynamic of expecting falling inflation that feeds into further falls in actual inflation. The proposed new fiscal stimulus and delayed fiscal tightening recognizes the lack of demand stimulators.

While QE is experimental, there is no certainty that it will shock inflation higher. The way QE is being executed also runs the risk of derailing its effectiveness. In trying to raise inflation expectations, bond markets have priced yields higher and mo netary policy appears to have tightened. Defenders of QE hope that yields may anyway have been rising, so net it remains stimulatory but this is open to debate. The only thing for sure is that equities remain higher post QE than pre QE announcement, suggesting some net benefit.

There is always the chance that the Fed shifts gears on QE. If yields rise too much, it may take a more proactive stance and use QE to steer yields lower. Either by focuses on implicit yield targeting or by purchasing more longer dated issues. It could also threaten to increase purchases. We think none of these lucky as long as equities and the economy seem to be on track for some kind of recovery. We think it is unlikely that the Fed will fall short of the $600 billion it intends to purchase even though market speculation as to that possibility will be rife in 2010h1.

And finally, stunningly, a sellsider dares to tell the sad truth about America's dire fiscal situation:

Fiscal policy should raise GDP by at least ¾ percent in 2011, assuming the payroll tax reduction is all spent. However, in our view, at best this buys some time for recovery. The deficit is huge and meaningful fiscal tightening is not far behind. Even if we dodge the Ricardian bullet of equivalence in 2011, there is at least 1 if not 2 percent of fiscal tightening slated for 2012. If underlying economic  growth remains in the 2-3 percent range, there is a sharp slowing implied for 2012.

Most market participants recognize the  disappointment in the economic recovery. Yet there is quite a diversity of opinions as to what should be done. Our own economists have remained confident that it is only a matter of time before corporates have the confidence to ramp up employment. QE is unnecessary and potentially dangerous for raising inflation expectations excessively. While they have scaled back the timing of Fed tightening they still think it is much sooner than the market currently expects. They interpret the recent sell off in Treasuries as growing confidence in the economic recovery story. The fiscal stimulus, while not  expected, adds icing to the recovery cake. The fact that real yields have risen 35 basis points for 10s in less than 5 days is consistent with this view. Breakevens have been broadly unchanged. Our European strategists are more skeptical about the recovery and more concerned about appropriate risk premium in the Treasury market. This reflects the poor score the US attains on a twin deficit monitor. For sure, it is somewhat incongruous that Ireland has to introduce new tax rates for the lowest incomes while the US moves to extend tax breaks for the highest incomes. They conclude that the dollar and yields can’t both be right. Either yields need to be higher or the dollar weaker to reduce the sovereign risk premium.

While these are legitimate concern for the market, we think the outlook for rates in 2011 should also recognize the time consistency of market repricings given the economic backdrop. For example, even if growth does accelerate into the 3-4 percent on the fiscal stimulus, it is not clear to us that the market can sustain forward rates of over 4 percent (3 ½ percent spot) in 10s if fiscal policy is likely to tighten in 2012. As it is elevated rates are choking the housing market again and they may also soon interfere with  progress in equities.

So simple, yet so incomprehensible to all those so-called economic pundits...

Full report below:


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Drag Racer's picture

scared the euo down to nothin...


(fat finger)

traderjoe's picture

Bonds will not re-rally again. No one will want to lend to the printing/spending/borrowing machine. It is obvious that there is no political will to re-pay principal. 6 months to bank holidays.

Dolar in a vortex's picture

6 months?

Maybe you're better at this kind of thing than I am, I guessed there would be riots in the US in the summer of 2010. It reinforced the idea that the market can stay illogical far longer than I can stay liquid.

traderjoe's picture

Being dramatic for the storytelling. Now that I've taken possession of some PM's I'm less concerned with the timing of it all.

MarketTruth's picture

No one needs to lend per se as the ECB will buy all European offerings while the Federal reserve will have their member (or just outright directly purchase) American debt. The difference is that when the privately owned Federal Reserve members buy US debt, they get to skim an additional few percentages off the top as 'profit' while the Fed then quickly buys back said debt via POMO. Call it double-dipping by the Fed.


Popo's picture

...which is why they need an equity crash right about now...

illyia's picture

This is the most interesting aspect of our current dilemma. Thanks for tracking and covering it in a way that I can not only understand well, but can use it to explain well. The Sheeple have no idea at all and it helps to inform them.

CrashisOptimistic's picture

When old people, who have money, are terrified, they are not going to stocks and they are certainly not going to gold.  Nothing that they associate with crashes will attract them

They will buy bonds.  The next crisis of any kind will send bond yields down.  Sharply.  Again.

greenewave's picture

To find out more about the Imminent Collapse of the U.S. Economy, watch this video "PUMP AND DUMP HORROR SHOW, END OF U.S. EMPIRE PONZI SCHEME" at (

by Anonymous

This feels like late summer 2008, when the Dow went like a rocket from 10000 to 14000 within a few months and we all know how that ended. I'm all cash now because I'm terrified by what is going on. I think we are headed for a huge CRASH sometime in 2011 or 2012. This time the Gov is so much in debt that it can do nothing and we will slide into the Greatest of Depressions.

revenue_anticipation_believer's picture

139 pages of bankers hopium....essentially message is 'all is well' no chaotic-system breakdowns, thats all 2008 stuff...2011 will be a continuation of 'on the mend', Spain is a non-issue, mostly near-end debt crisis, but absolute Spanish debt easily manageable...

that America will probably pass the continueing Bush tax cuts



but let us ponder....the likely hood of the many optimistic assumptions THEN i see GLOOM lots of it..


rather than hoarded/saved....that

THERE IS NOT/WILL NOT BE A PROLETARIAN/BLUE COLLAR secular permanent demand/consumption ddrop - as there was in the 1930's...

and this in the back drop of suspended unemployement benefits,

of being 'evicted' from the houses they have lived in FOR FREE, having stopped making payments...NOT having THAT extra $1800/month free money...

and this despite the permanent SECULAR change in Labour requirements - higher skill levels, lower tolerance for incompetent workers,

city/state/federal Reductions in Force PERMANENT..

and the implication that the USA Fed will probably continue QE2 right thru the $600 billion, and THAT WILL HELP artificially keeping 10-30 year bond rates back down 2011 than 2010....hahahahah lol   despite the complete insanity of buying at PAR, ANY BONDs in this Economic enviroment -

the future WILL NOT BE MORE OF THE SAME...but VERY VERY different, in a SECULAR ACT OF CREATIVE DESTRUCTION, long overdue anyway, regardless of year 2008 instancing..

and the implication that YES, there will probably be more corporations (those 'creditworthy') frefinancing with low rate bonds....SO THAT BOTH GOVERNMENTS AND CIVILIAN BUSINESSES WILL BE WANTING BUYERS OF THOSE BONDS....

this means HIGHER RATES...unless the USA and Europe want to buy up ALL THE LONG-BONDS EVER ISSUED FROM NOW ON....

There will be losers, Capital Loses that have NOT yet been 'recognized' much less written down...

WHO WILL BE THE SUCKER? ALL THE LONG BOND HOLDERS - Pension funds, mutual funds, pensioners in their own stock plan, and lots more ----future tax payers  born in 2020 right!

NOT PIMCO...they have a plan, not understood, obviously...good the less that implement their plan, the more it will work...


CIABS's picture

since i don't have a television, i must ask: what is the name of the douchey economist in question?  thanks in advance.

Ted K's picture

I have no idea either.  I don't watch CNBC anymore, unless they're having one of their 29 second interviews with someone (say Meredith Whitney or David Rosenberg for example) who doesn't drink the "CNBC fuck retail investors' flavored Kool-Aid".  That being said, based on a net search using some key words I'm guessing Joseph Lavorgna as he seems to be a Deutsche Bank regular there.  I have no idea if Durden's comment is in fact accurate, but based on the average CNBC  guest/equities pimp.......

Id fight Gandhi's picture

When a state goes bust and they bail it out and I don't think the world will go back to normal again. I'd don't even think the ireland bailout will allow business as usual. These are all problems staring everyone in the face, yet they ignore it, scream recovery, and oddly acted surprised when it collapses over some idle weekend.

We can't have any sort of recovery with housing getting worse, gas over $3, no consumer credit and high unemployment.

They can play the shell game, pump the markets, but it will all implode

The true black swan is probably something staring right at us now and being overlooked. Tick tock

Id fight Gandhi's picture

Wow, tight range in world markets Waiting on fomc. I know everyone is expecting the usual, nothing. But my gut is telling me something is up.

Something will rock the markets.

A Man without Qualities's picture

Irish parliament votes on the bailout plan tomorrow.  Something in my gut tells me it won't pass.  You've got the US politicians acting like they're having their last weekend in Vegas and the French and Germans deciding that in future, bond holders will take haircuts. The best thing for the future of Ireland is to get their debt restructuring done now, rather than kid themselves and face a bigger mess in a couple of years.

primefool's picture

If the Euro - that thing - the obvious dod bird in the world of finance - the Thing that cannot possibly work - can be made to go up- Then.

It will initially confuse people, but over time will increase their faith in paper money. Because you see if something as obviously unworkable as the Euro  works, then all one can do is throw aside all cynicism, scepticism and analysis - and simply bow down in prayer at the alter of Ben.

primefool's picture

Its all about faith, If you want a better handle on monetary economics perhaps read old workbooks on "church administration" or some such manual. You can always employ violence to get people to "believe" - so thats there. But would'nt it be better if we could achieve that without the violence? For instance lets get Ben to debauch the money - do it in spurts and in bits and pieces to keep people confused. Then we get Timmy to tax any "earnings" you might acomplish in your desperate attempt to keep up with the currency debasement - good luck.

DeltaDawn's picture

My gut tells me in March there will be will crying in the streets. We may want to come up with some one-liners for this period of shock and awe. Might be handy to have a flask to administer first aid.

TexDenim's picture

I downloaded this report and will read it. I have found that the European banks do excellent research. My favorite is Danske Bank in Denmark. They cover their own region very well and even do some analysis of the US that I have found insightful.