As the Federal Reserve signals it’s satisfied after pulling off a mid-cycle easing, Wall Street’s rate strategists are as divided as ever on the direction of Treasury yields.
JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou warned that 10-year yields may surge 100 basis points over the next six months given the Fed is now done with its “insurance” cuts. Bruno Braizinha of Bank of America Corp. sees the risk that yields on some Treasuries will go negative by 2021 because he says the U.S. central bank could cut rates all the way to zero.
The message from the Fed, combined with solid U.S. job creation last month and optimism about U.S.-China trade talks, has pushed expectations for the next rate cut well into 2020. Fed fund futures aren’t penciling in a full quarter point cut until about September.
The yield move London-based Panigirtzoglou envisions would mirror what happened when the Fed engineered a similar three-quarter-point cut in a counter cycle maneuver in 1995. JPMorgan’s U.S.-based rates team is more sanguine, lifting its Treasury yield forecasts to 1.65% for year-end 2019 and 1.85% for mid-2020. That would be little changed from around 1.79% Monday.
Panigirtzoglou did add some big caveats to his bolder prediction. It assumes that the U.S. macro picture remains consistent with a mid-cycle adjustment, with resilience in employment and consumer confidence, as well as a rebound in manufacturing.
Fed policy makers appear comfortable with their stance, with both Chairman Jerome Powell and Vice Chairman Richard Clarida saying “monetary policy is in a good place” last week. Yet the Fed may be partly to blame for the market confusion given it abruptly went from tightening as of the end of last year to easing in 2019.
“Bear in mind, it was tightening last year and insistent there would be even more rate hikes this year,” Christopher Low, chief economist at FHN Financial, wrote in a note. “The Fed is not very good at forecasting the economy.”
Braizinha of Bank of America tells investors to brace for lower yields, predicting the 10-year moves to about 1.25% over the next three months. Deterioration in the U.S. economy and the reality that even a U.S.-China trade deal won’t be the panacea to all the world’s growth woes is key to this call — and the reason he sees more Fed easing in the offing.
UBS Group AG sees the downside for yields this year as even bigger. Chirag Mirani, head of U.S. rates strategy at UBS, says Treasuries are “very cheap.” He predicts the 10-year yield ends 2019 at 1%.
Investors are being pushed toward positive-yielding Treasuries as global debt gains have turned yields negative in the safest European nations such as Germany and France. The rally is not over yet for HSBC Holdings Plc.
“We are strongly opposed to dubbing the rally in bonds a ‘bubble’,” wrote HSBC strategists led by Max Kettner in a note. The firm is recommending investors favor Treasuries and bonds from the euro area’s peripheral nations.