Yesterday we explained why according to Bank of America, despite the big equity squeeze Treasurys refuse to move lower, and in fact have continued to drift higher in price. We also noted that according to a Reuters blurb, Guggenheim CIO Scott Minerd said on Monday that he sees the 10-year Treasury note yield falling to 1 percent, perhaps even lower, before year-end.
Below are key excerpts from his just released argument for why the best trade of the year will be to buy 10Years in May, or any other month for that matter, and go away until December 31.
Markets are in a funk over the risks to the global economy—and there are many—but I believe future market historians will refer to the current period as “The Great Recession Scare of 2016.” At this point, market dynamics are playing out the way our macro research predicted over one year ago—that collapsing oil prices would lead to an increase in defaults in energy credits sometime in the first or second quarter of 2016, and that there would be a sympathetic widening in other high-yield sectors outside of energy. Our research tells us that beyond this spike in energy defaults fundamental conditions are copacetic, yet the markets and policymakers are reacting as if recession or full-blown financial crisis were at the gates, if not already upon us.
For example, the decline in breadth, as exhibited by one of my most reliable indicators, the New York Stock Exchange Advance/Decline line, continues to make new cyclical lows, signaling that equity prices have further to fall. Our analysis indicates that the S&P 500 could drop to a range of 1,600 to 1,650 and the Nasdaq to 3,800 before we find a bottom. A fitting analogy for the recent rollercoaster in equities may be the sharp series of rallies we experienced in 2007 and 2008 before the market ultimately capitulated. At the same time, investors should remember that such a market decline does not necessarily portend a recession. For those of us who remember, after the market crash of October 1987 the next U.S. recession was still two years away, creating a great buying opportunity. I could say the same for the periods following similar market declines in 1994 and 1998.
Central banks around the world, reacting to the same recessionary fears, are likely to cause long rates to sink materially lower than where we are today. I see the 10-year Treasury note falling to 1 percent, perhaps even lower, before year-end. According to technical analysis, the current target bottom for the 10-year Treasury note is 28 basis points! That may seem like voodoo, but technical analysis provided key insight to our macroeconomic team a year ago when we called for oil to hit $25 per barrel back when it was trading at $60.
A barrel of oil at $25 or 10-year Treasurys yielding less than 50 basis points may seem like crazy numbers, but so do the negative interest rates that we are already seeing in Europe and Japan. As low as rates are today, I expect further declines in short-term and long-term rates, both in Europe and Japan, and that ultimately the Bank of Japan and the European Central Bank will take their respective overnight rates to as low as -100 basis points. Such an event would likely cause Germany’s 10-year bund to trade at around -50 basis points. When you consider that the current spread relationship between bunds and Treasurys is about 150 basis points, you can easily see why the U.S. 10-year note at 1 percent is not that farfetched. Given that U.S. Treasurys have traded at yields lower than bunds, it is not hard to imagine that the 10-year note could yield less than 1 percent if the bund were to reach -50 basis points.
More in the full note