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