HSBC thinks the 10-year yield will fall to 2.1% this year# Stock
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From the lofty peak of near 3%, it may be hard to imagine the 10-year
Treasury 10_YEAR -0.90% yield taking a 90 basis point dive, but don’t
count out the believers. HSBC’s global head of fixed-income research,
Steven Major, says the 10-year yield is poised to hit 2.1% by the third
quarter of this year, and he outlines that contrarian call in a 2014 outlook.
10-year Treasury yield
Most expect yields to rise and prices to fall because of improving economic
data, which suggests that the Federal Reserve could move forward its gradual
path toward policy normalization. But Major suggests looking at it
differently. The 10-year yield is derived from two factors: The Federal
Reserve’s key policy rate, and term premium, which is the additional
discount priced in for the risk of holding debt for longer.
“It is the latter that had previously been pulled lower by unconventional
monetary policies and majority ownership of U.S. Treasuries by the official
sector,” Major writes.
As the Fed inches out of these policies, there are a couple of reasons for
the 10-year yield to fall. For one, the market is pricing in rate hikes “
earlier than is likely to be justified by central bank actions,” he says,
particularly with subdued inflation, one of the key determinant of the Fed’
s policy rate.
Plus, term premium is poised to reverse its growth, in part because of
improvement in the U.S. fiscal position. He writes:
“One overlooked result of the gradual recovery has been the improvement in
the US fiscal position, even though the total debt level remains high. Only
a year ago, consensus expectations were conditioned by fears of a fiscal
cliff and a budget deficit heading for 10% of GDP. Now, the federal deficit
is heading below 3%, with the first two months of the fiscal year (starting
in October) showing a 22% y-o-y decline; driven by both better receipts and
reduced spending. This trend also supports lower yields.”
Given this outlook, HSBC says there’s value to be had in extending duration
to the intermediate sector of the curve, particularly buying debt in the 5-
year to 10-year range, Major says. Bill Gross, by contrast, wrote that
investors should stick to the 1-year to 5-year range. As an asset class,
fixed income could return 4% to 5%, Major writes.
Treasury 10_YEAR -0.90% yield taking a 90 basis point dive, but don’t
count out the believers. HSBC’s global head of fixed-income research,
Steven Major, says the 10-year yield is poised to hit 2.1% by the third
quarter of this year, and he outlines that contrarian call in a 2014 outlook.
10-year Treasury yield
Most expect yields to rise and prices to fall because of improving economic
data, which suggests that the Federal Reserve could move forward its gradual
path toward policy normalization. But Major suggests looking at it
differently. The 10-year yield is derived from two factors: The Federal
Reserve’s key policy rate, and term premium, which is the additional
discount priced in for the risk of holding debt for longer.
“It is the latter that had previously been pulled lower by unconventional
monetary policies and majority ownership of U.S. Treasuries by the official
sector,” Major writes.
As the Fed inches out of these policies, there are a couple of reasons for
the 10-year yield to fall. For one, the market is pricing in rate hikes “
earlier than is likely to be justified by central bank actions,” he says,
particularly with subdued inflation, one of the key determinant of the Fed’
s policy rate.
Plus, term premium is poised to reverse its growth, in part because of
improvement in the U.S. fiscal position. He writes:
“One overlooked result of the gradual recovery has been the improvement in
the US fiscal position, even though the total debt level remains high. Only
a year ago, consensus expectations were conditioned by fears of a fiscal
cliff and a budget deficit heading for 10% of GDP. Now, the federal deficit
is heading below 3%, with the first two months of the fiscal year (starting
in October) showing a 22% y-o-y decline; driven by both better receipts and
reduced spending. This trend also supports lower yields.”
Given this outlook, HSBC says there’s value to be had in extending duration
to the intermediate sector of the curve, particularly buying debt in the 5-
year to 10-year range, Major says. Bill Gross, by contrast, wrote that
investors should stick to the 1-year to 5-year range. As an asset class,
fixed income could return 4% to 5%, Major writes.