As Bloomberg begins it story about some very confused bond market analysts, "a year that started with almost everyone calling for the Federal Reserve to raise interest rates is drawing to a close with one of the world’s largest bond dealers saying there’s increasing chatter about the need for additional stimulus."
The reason: increasingly more reputable sellside firms are beginning to sound just like this website, in this case Morgan Stanley, which in a note titled, What’s more likely: QE4 or negative rates? said "almost immediately after September nonfarm payrolls figures flashed on the screen, the phones started ringing."
More from Bloomberg:
Morgan Stanley, one of the 22 primary dealers that trade directly with the Fed, says its clients began discussing the possibility that central bankers will resume bond purchases -- or cut interest rates to below zero -- after a weaker-than-forecast U.S. employment report last week. The firm recommends buying medium-term Treasuries.
To be sure, this is merely everyone catching up with what we said back in January when we posted "Get Ready For Negative Interest Rates In The US." Janet Yellen confirmed as much in late September when following the infamous -0.25% dots by Kocherlakota, in her speech previewing the future path of inflation she said "...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities."
So as more and more "reputable" analysts realize that the 30 Year bull market in Treasury isn't going anywhere...
... another firm jumped on the bandwagon overnight, when HSBC's Steven Major slashed his target yield on 10Y Treasurys for 2015 and 2016, from 2.4% and 2.8% to 2.1% and 1.5% respectively. The reason: more easing of course, or rather expectations for further ECB monetary easing which will help U.S. curve to perform.
From the note:
We believe the path of rate hikes, when and if they start, will be shallow. Compared with the Bloomberg median, our 10-year Treasury forecasts at 2.1% for end-2015 and 1.5% for end-2016 are 38bp and 153bp lower respectively. Indeed, consensus expectations for the first Fed funds hike have been pushed into 2016, reflected in futures prices. The 50bp two-year T.note forecast, made in August, is still in place for end-2015 and into next year. We recognise that the risk of a December hike remains but the bond’s valuation is also a function of what happens afterwards. In August, we were prepared to take the risk of hikes in September and December, so we can take the risk of a December hike now.
More from Major:
The conventional view has been that a normalisation of monetary policy would be led by the Federal Reserve, involve a rise in short rates and a flatter curve. This has already been proven completely wrong. EM central banks have moved from accumulating dollar reserves to shedding them (All bark, no bite: Fixed Income Asset Allocation, 10 September 2015, pages 3 and 4). This may be a type of tightening but it was not started by the Fed. In fact short rates are lower than at the start of the year and the Fed hasn’t hiked despite consistent anticipation. This has contributed to a steeper curve than projected by the forwards, with the two- to 10-year Treasury curve 70bp above the one-year forward curve for the whole of 2015.
As noted above, the thesis is more easing from ECB...
Our conviction on ECB policy remaining accommodative beyond the end-2016 forecast horizon is relatively high. Indeed, we think it likely that there will be more easing soon (ECB & QE, 22 September 2015). Ultimately we believe the ECB is compelled to do more by its own objectives and that the modalities of the PSPP will have to shift accordingly to make it possible.
... And less tightening, if any, from the Fed:
We are less convinced that the Fed will deliver the tightening anticipated by the forwards. Given the softer domestic data and fragile global backdrop, we wonder what a ‘data-dependent’ FOMC might have discussed at the September meeting. We have previously looked at how tightening of financial conditions can happen without a rise in short rates; over the last two months, given higher real yields and wider credit spreads it could be argued that this is already happening.
Major's conclusion: is the US "turning Europe", or is it Japanese:
The US is ‘turning European’, or is it Japanese? So the new US forecasts have shifted the bullish steepening bias into the five- to 10-year segment. This represents a significant ‘bowing-in’ compared with the spot curve not unlike the Eurozone curve. If the German Bund market has been ‘turning Japanese’ perhaps the US curve could ‘turn European’?
We have forecast a large drop in the long forwards for both the US and Eurozone. The US 5y5y is now 2.3%, down from 3.4% and the Eurozone at 55bp down from 1.75% (Figure 2). So our long forecasts are more than 100bp down from last month. For end-2016, the difference between 5y5y for the US and Eurozone is in fact just a little wider, with the spread at 175bp (from 165bp). We recall earlier this year how the drop in Eurozone yields contributed to lower US term premium (see Figure 4).
Incidentally, this entire thesis is upside down: the probability of more QE or NIRP by the Fed would actually lead to more selling in USTs, as risk assets are actively sequestered. It is only when the probability of another credible rate hike re-emerges that TSYs will tumble as the great unrotation from stocks into bonds forces yields well under 2% yet again. But that is a sellside epiphany for another day.