Why The 10Y Yield Is Heading To 1.5% In 1 Simple Chart

Tyler Durden's picture

Submitted by Gavekal via Advisor Perspectives,

Last week we wrote that the bond market is following perfectly the reduction of QE with new 1-year lows and with today's bond moves that trend is still firmly in place.

In what may seem counter intuitive, treasury bond yields have had a high positive correlation with the rate of Federal Reserve asset purchases. When the rate of Fed asset purchases rises, bond yields rise, and vice versa. If one thinks of Fed asset purchases as stimulative to growth and inflation expectations (the two components that make up risk-free bond yields) then this positive relationship makes sense.

In the charts below we measure the rate of Fed asset accumulation by measuring the three month difference in the size of the Fed's balance sheet. Since the Fed has scripted out the end of QE, we can easily model out how this rate of change will proceed for the remainder of the year.

We then compare the rate of change in Fed assets to the 30-year bond


the 10-year bond... 1.5% by year-end


and junk spreads inverted


The link between Fed asset accumulation and these various bond yields is unmistakable, especially for longer duration bonds, and this simple model shows how even lower bond yields may be in the offing as the Fed puts on the breaks. For junk bonds, this seems to portend higher spreads, which may help to put the recent widening of spreads in context.

*  *  *

So - tapering is tightening on risk assets...

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Notsobadwlad's picture

Saw a Morgan Stanley guy at a neighborhood party. He certainly believes that bond rates are going down (prices going up). He is not the brightest guy, but heck if you are an insider it does not matter, does it?

Say What Again's picture

Does this mean I can re-finance my house in Marina del Rey again (for the 3rd time in 5 years)?

I want to get below 3.5% for a 30 year fixed.

Al Huxley's picture

This will TOTALLY support the housing market - think what people will pay for even the lowliest shithole crackhouse when 30yr mortgages go for -3.5%.  Even Detroit will see a renaissance.

Say What Again's picture

Good point.  I might just go there and buy an entire street. 

While I'm at it, I might even buy an old ballroom



Pladizow's picture

"If one thinks of Fed asset purchases as stimulative to growth and inflation expectations....."

That's a very big "If" that begins that statement and is hard to agree with.

Is it possible that it is not the Feds purchases alone, but global demand that has held rates down??????

Say What Again's picture

Yes - The FED, ECB, BOJ, PBOC, etc., have ALL been engaged in Extreme-Printing.

All of this new fiat currency has to find a place to land.  Where do you think most of it went?

Pladizow's picture

My question was rhetorical?

I was alluding to, Correlation is not causation.

So the Fed could sell and if in net the global purchases are still positive, rates will continue to decline.

Say What Again's picture

Please correct me if I am wrong, but I don't think I said that YOUR question was rhetorical.

And BTW, I agree that "Correlation is not causation."

Do you read ZH in "threaded mode?"

Pladizow's picture

I'm saying my question was rhetorical.

And I dont know what "threaded mode" is.

Say What Again's picture

Ah!  I think I understand you now.

Regarding "threaded mode," go to the top of any discussion, and look just under the phrase; "Comment viewing options," which is printed in large bold letters.  You will see a drop-down menu item that lets you select "threaded mode" or something else.

daveO's picture

The FED countefeits(QE) and gives it to banksters(reserves). The banks front run all the markets with free money, wee! The FED takes away this free money and the monetary tide goes out of all the markets except one. Everyone heads for the safety of Treasuries. When markets have tanked and rates have hit new all time lows, look for the next QE. This is the only income generator they've had for 5 years.

The Most Interesting Frog in the World's picture

Agree up to the point you say there will be QE again. I don't believe they are going to do that. Next time my guess is bail ins. More QE threatens the dollars reserve status which seemed impossible 5 years ago. Now, there seems to be a threat daily.

So save banking system through inflation last time, solve it through deflationary bail ins next time. Just another asshole with an opinion....

fonzannoon's picture

I think this article is accurate about the direction of yields but at this point the more yields drop the more div paying stawks get bid as well as investment grade bawnds. That should be enough to continue to make the bond and stock market look fantastic, even if high yield starts blowing up. 

There will be a point however when you can't squeeze any more yield out of any asset, and then the implosion starts and works it's way out and it's game over.

LawsofPhysics's picture

I agree.  Rates cannot rise because of the liabilities of the U.S. government, period.  So long and we have ZIRP, it's risk on.

kaiserhoff's picture

So these fools have a model.  No logic, motivation, reason, incentives or disincentives, just a model.  If they believed this, they would put their own money in it, but it's much safer to sell advice to the unwary.

The whole world is screwing with QE.  Japan is the worst offender, and it isn't working as planned anywhere. 

When someone, anyone, has to defend a currency from total collapse, what happens to your piss ant model?

El Vaquero's picture

Without QE, one might expect a dash from trash to "safety."  Of course, the effects will not be permanent.  

ThroxxOfVron's picture

"The whole world is screwing with QE.  Japan is the worst offender, and it isn't working as planned anywhere. "

I believe that far too many Central Banks have been engaged in QE for far too long for everyone not to understand the real world effects.  

IMHO, the achieved results of QE are in fact the intended results of QE.

eclectic syncretist's picture

You are presuming that the fedbanks want to avoid a US gov default, but they have already planned fot it.

Al Huxley's picture

Nah, negative interest rates will let the party continue more or less forever - where's your faith in the system Fonz?  All this doom-and-gloom, it's almost as if you question the enlightened wisdom of current policies.

fonzannoon's picture

LOL, sorry Al, as I said before, don't expect much...

I like this fund a lot..


This guy knows that eventually people will be buying CYNK 10yr bonds for .0075% yield. There is an end point, but we will all prob be busted out by the time we hit it.


Al Huxley's picture

It was down .32% today, what the fuck is he doing wrong!  ... and where can I get these CYNK 10yrs you speak of?

NoDebt's picture


What happened in Japan 20+ years ago?  Well, investors got the crap scared out of them and everyone went running to the safety of bonds (most notably government bonds) even as successive rounds of QE were unleashed.  Equities were shunned, nobody wanted to risk losing money.  "Animal Spirits" died a slow, agonizing death as the population aged and any thought of economic growth became laughable, dismissed out of hand.

They were driven by fear.  Not greed.  And down went the yields along with their stock markets.

Do you notice an corollary to this mindset with your clients?   I do with mine.

Nobody wants to hear shit about anything that isn't guaranteed.  GOVERNMENT guaranteed, preferrably.  The same mindset that took root in Japan is becoming firmly entrenched in the US.

I'd be looking into setting up MYRA accounts with your clients.  And lean heavy on long-dated maturities before you pine for the days of 3% yield.


fonzannoon's picture

Just keep in mind that while yields go Japan there is still one difference


I think that helps stocks and bonds until we reach the end.

NoDebt's picture

Heh heh.  Yeah, that might just do it.

panem et circenses's picture

Although under different assumptions, the thesis is in sync with that of Lacy Hunt.

The trend of downward pressures on the long end of the yield curve is intact and does not find reasons to abate for at least few more years:

panem et circenses's picture

Honesly, no. I joined the folks here recently and never noticed "The Gooch".

Am Italian and know Latin though.

Sam Spade's picture

Lacy Hunt is a rare bird - a superb economist, as well as a bond market historian with an acute sense of history (unlike most bond "strategists" today, who merely try to predict the Fed's next moves).  Yes, I'm a fanboy...

panem et circenses's picture

I mainly agree but not completely with L.Hunt's thesis.

Primarily, he does *never* distinguish the different currencies regimes (fiat, gold, redeemable, etc...) underlying the different periods he discusses.

I cannot believe that different currencies regimes command the same outcome/behaviour of interest rates.

As matter of fact, L.Hunt received an educated (stupidly harsh, though) dismissal of his thesis here:


yrad's picture

I think I speak for all Loan Officers when I say, "bring it!!"

EscapingProgress's picture

Refi's bitches! Gimme those fees dammit! You'll never see rates this low again! BUY, BUY, BUY!!! DEBT, DEBT, DEBT!!! MONEY, MONEY, MONEY!!!

"I get money." - Janet Yellen

spinone's picture

Shut up, sharknado2 is on.

Al Huxley's picture

Fuck!  I knew it and I totally spaced on the time!

AgeOfJefferson's picture

This trend assumption is with everything else being equal...

Boston's picture

When the shit hits the fan---finally---in terms of risk assets selling off, 1.5% on the 10yr will be a lay up.

Sub-1.0% will be a real possibility. 

And in 10 years, 0.5% will become necessary to delay a US government fiscal crisis. Think Japan.

fonzannoon's picture

I'm interested to see how the pension system handles that.


kaiserhoff's picture

Wall street and government can play this game for a long time, but Main Street is shutting down.

There goes employment, consumer demand, real estate, etc.

Professorlocknload's picture

10 years out, the present "System" won't exist. Politics being what it is, and all.

Make_Mine_A_Double's picture

Can someone explain to a laymen why cost (interest) on long term bonds could be descending in an environment of pure economic uncertainty.

One would think that interest rates would be climbing on the knowledge of a dollar or debt Collaspe.

Unless of course it is us.gov buying them all.

CrashisOptimistic's picture

Because there's no evidence of explosive growth in borrowing. 

If people don't want to borrow, and you want to lend, how can you raise the price of the loan you're peddling?  The price of the loan is its interest rate. How can you tell people the interest rate is 3% when they refused to borrow at 2.5%?

Hard to raise the price of things people don't want.

Bonds took a rather mild hit today, overall because there is probably doubt about that GDP number.  No one believes that explosive growth in demand for borrowing is there, so no one thinks the price of those loans can rise.

Just what, 3-4 days ago we got the new single family home sales numbers for June and it was a disaster, with revisions for May, April and March, also disasters.

How does that happen in a 4% economy?  Answer: it doesn't. It's not a 4% economy.

Make_Mine_A_Double's picture

Thank you!

One follow on - given we are almost certainly in (and have been) a contraction and growth is an allusion for foreseeable future where does it go from here?

Are we turning Japanese??

daveO's picture

Of course, we are. It was our FED officials who advised the Japanese on how to protect their banks at the economy's expense. The only difference is foreign confidence in the dollar. If that's lost along the way, then turn USSR in 1991. 

Professorlocknload's picture

Still a "Flight to Safety" factor out there. Old sentiments die hard.

Have to admit, for 5 years I've been gonna sell a core low cost GNMA Fund, but just can't hit the button.

kaiserhoff's picture

Lots of currency being printed world wide, with no sensible place to go.

Yes, it really is that simple.

Say What Again's picture

If there are more buyers than sellers for a given bond, the PRICE of the bond goes up, and the yield goes down.  The better question then is this; why is there so much demand for bonds? Exogenous geopolitical events have an influence on demand, but they are not the only influence on demand.

The strongest influence on the demand for bonds in this current environment is the FED, which is aggressively buying fixed credit of all kinds (e.g., QE, POMO).  Next, ALL of the central banks are printing, and that money has to go somewhere, and a significant part of the new money is going into bonds.

Amish Hacker's picture

Another big part of bond demand is as collateral for swaps in the enormous, tippy tower of derivatives. ZH has had some articles on this lately, and on "fails to deliver" as an indicator of bond tightness desperation. Part of the reason the Fed is tapering is because Fed purchases crowd out the other players at the table who need those bonds.