Why One Trader Thinks Calls For A Yield Rebound Are Wrong

With the 10Y nearly touching a 1-handle ahead of this weekend's battery of potential risk-off events, none of which however materialized in their worst-case outcome, many are once again calling for a bottom on yields, especially as net spec shorts rose over the past week according to the latest CFTC COT data.

And yet, not everyone is convinced that "this time is different." As Bloomberg macro commentator Wes Goodman writes overnight, "after the U.S. 10-year yield fell to just above 2%, what’s next? It’d be easy to say it should snap back to a range of 2.3% to 2.5%, especially after it jumped at Monday’s open. But that’d be too boring. That’s the consensus view." Instead, Goodman joins a small group of rates bulls who believe that despite today's risk-on euphoria, the next move in yields will be down, not up, and list the following reasons why "the world benchmark for borrowing costs can drop below 2%."

His full note below:

Calls for U.S. Yield Rebound Are So Passe. And Wrong: Macro View

 

After the U.S. 10-year yield fell to just above 2%, what’s next? It’d be easy to say it should snap back to a range of 2.3% to 2.5%, especially after it jumped at Monday’s open. But that’d be too boring. That’s the consensus view. And keep in mind the consensus calling for higher yields has been wrong for years. Here are the reasons the world benchmark for borrowing costs can drop below 2%.

 

Minneapolis Fed President Neel Kashkari says Federal Reserve interest-rate increases may be “doing real harm” to the U.S. economy. The hikes may be slowing jobs growth, leaving people on the sidelines and curbing inflation, Kashkari said earlier this month.

 

By this reasoning, even another Fed rate hike this year would help Treasuries. After all, yields have tended to head lower as the central bank pushes its benchmark higher.

 

And inflation is already going the wrong way. Pimco’s Dan Ivascyn said in June that slowing inflation opened the possibility the 10-year yield would decline to 1.5%.

 

Treasuries demand is also likely to be supported by softness in other markets. U.S. assets such as real estate, stocks and junk bonds are at risk as the Fed unwinds its quantitative easing program, says Yusuke Ito at Asset Management One in Tokyo. The Fed’s decade-long effort to push interest rates down aimed to channel money to these assets, and they’re in jeopardy now as policy makers begin to dismantle the program, he said.

 

Japanification is transforming America too: An aging population will curb economic growth, rising welfare costs are limiting room for fiscal stimulus and banks are hoarding bonds instead of funneling money into loans.

 

North Korea is keeping demand for haven assets alive.

 

While it’d be easy to go with the consensus for higher yields, the case for a further push lower isn’t too shabby. And it’s usually been correct over the past 30 years

Comments

t0mmyBerg onthedeschutes Mon, 09/11/2017 - 09:46 Permalink

Yes, especially as he neglected to mention the most critical near term market element, Treasury Supply.  Whether the Debt Ceiling was taken care of for a few months or a year or more, the Treasury is going to be coming to market with an absolute shit tonne of bonds to pay for the deficit, whatever the Fed allows to rool off, and to rebuild its cash hoard.  Europeans, apparently anticipating this, and knowing Draghi will be folowing the Fed on a lag (wink, wink), started taking some money out and so the EUR rose.  Watch the TBAC announcements and the Treasury announcements on funding.  $500 Billion at least in Q1 Fiscal.  Thats a $2 Trillion run rate.  Who is going to buy all that?  The Fed.  Which is why Gold is over $1325

In reply to by onthedeschutes

NickyGall Mon, 09/11/2017 - 07:34 Permalink

Here is an article that looks at how the world’s central banks have totally distorted the global bond market: https://viableopposition.blogspot.ca/2017/08/the-wacky-world-of-soverei… When the world’s third-most indebted nation has an interest rate that doesn’t reflect any part of the risk involved in their bonds, investors should be very cautious.
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin:0cm;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:12.0pt;
font-family:Cambria;
mso-ascii-font-family:Cambria;
mso-ascii-theme-font:minor-latin;
mso-hansi-font-family:Cambria;
mso-hansi-theme-font:minor-latin;
mso-ansi-language:EN-US;}
 

Arnold Mon, 09/11/2017 - 07:41 Permalink

"Minneapolis Fed President Neel Kashkari says Federal Reserve interest-rate increases may be “doing real harm” to the U.S. economy. The hikes may be slowing jobs growth, leaving people on the sidelines and curbing inflation, Kashkari said earlier this month."

It makes Deutsche Bank squeal.
Good reason to hike.

new game Arnold Mon, 09/11/2017 - 08:04 Permalink

financial survival of fed reserve notes and debt structure over 3 x.simple shit maynard.rate rise too much and this mess collapses.simple shit maynarddark clouds gather on the horizon...paycheck to paycheck will not work.over 50 percent of the population will be desparate within 2 weeks.gonna be a dosey..crank that war machine up.

In reply to by Arnold

Never One Roach Mon, 09/11/2017 - 07:55 Permalink

I saw the 13 month t-bills are seldom rising above 1%. Some banks say if you deposit BIG money they will give you a whopping 0.06% yield. otherwise you get 0.01%. No wonder the middle class is broke. High taxes and zero savings yield and a high jobless rate.

silverer Mon, 09/11/2017 - 08:20 Permalink

The claim by many is that negative interest rates forcing spending, permanent debt of the citizens to the banks, huge government spending and deficits, will create Unicornville. I'm not in agreement. Right now, the government is still not happy stealing the producers money with inflation. They want more. Unicornville is waiting.

libertyanyday Tue, 09/12/2017 - 02:09 Permalink

big picture, the economy has been slowing since 1981.  The national debt has increased EVERY year since nixon gave us monopolymoney.  real term wages have been decreasing while inflaton has been steadily devaluing what little is saved.  No one needs to build anything new, no one needs money, the usa is awash on cash, no one is borrowing.........no one is buying starter homes, renting for life is the new way.  We will never reverse, interest rates are decreasing and will hit negativer one again.