With interest rates marching relentlessly higher both in the US and across the world, even as much of the yield curve pancakes and inverts to pre-recession if not pre-depression levels…
… because the last time the 2s30s 1Y fwd was here, the dot come bubble burst…
… Wall Street has once again shifted its tune for obvious reasons, and while no longer predicting the yield curve can’t invert – pretty much everyone now acknowledges it’s just a matter of time, with Goldman predicting 2s10s goes negative next quarter..
… the stock market’s cheerleaders are instead trying to convince anyone who cares that the only curve that matters is some transposed version of the 3M10Y, which of course is laughable as explained in “Battle of the Yield curves.“
So while their opinions may be largely discredited, strategists still call the shots for better or worse, and here – courtesy of Bloomberg – is a summary of what the top rates strategists write in their weekly research reports, about the potential for Treasury yields to continue to rise and the curve to invert. Several revise year-end yield forecasts or Fed balance-sheet expectations, and flag that pension funds are likely to step up long-end buying during 2Q.
Bank of America (Mark Cabana, others, March 25 report)
- Revises year-end rate forecasts higher:
- 2-year: 3%
- 10-year: 2.5%
- 10-year real: 0%
- Real policy rates don’t reflect restrictive Fed policy, and this “presents an opportunity for investors to trade a flatter real yield curve and express higher near-forward real rates”
BMO (Ian Lyngen, Benjamin Jeffery, March 25 report)
- With Fed inclined to do half-point rate hikes in May and June, “all roads lead to curve inversion”
- “The bearish window for Treasuries remains intact as quarter-end approaches,” however “we suspect that Q2 will usher in a round of stability in longer-end Treasuries as front-end yields continue to march higher”
Citi (Jason Williams, March 27 report)
- Fed 50bp hiking narrative “implies that reserves, and not RRP, are likely to be drained when QT starts,” which “may add further stress to UST liquidity and risk assets”
- Dislocation between 3m2y Treasury curve (steep) and ED5 vs ED9 curve (inverted) is largest since 1994 hiking cycle, which was followed by cuts in 1995
- Biggest pension funds are likely to buy more bonds in 2Q, supporting long end, after funded status ratios reach 105% based on higher 30-year yields
Goldman Sachs (Praveen Korapaty, others, March 24 report)
- Raised Treasury yield forecasts “to reflect more broad- based and persistent price pressures and the accompanying hawkish Fed pivot”
- More here
JPMorgan (Jay Barry, March 25 report)
- Sees scope for yields to rise further, creating “upside risk to our 2.5% 10-year yield target” for year-end
- “Policy rates may need to rise to even more restrictive levels than what’s priced in, forward real rates still point to significantly accommodative policy in 2- to 3-years’ time, and intermediate Treasuries remain rich to fair value”
- Supply/demand backdrop “is also shifting bearishly, with balance sheet normalization expected to commence in May and bank demand for Treasuries likely to remain light this year”
- 10s30s curve “no longer appears steep versus the broader curve, suggesting limited room for further near-term flattening, though LDI demand could pressure the curve flatter over the medium term”
Morgan Stanley (Guneet Dhingra, March 25 report)
- Revises Treasury yield forecasts based on Fed call:
- 2year: 3%
- 10-year: 2.60%
- This month’s rise in yields appears “more durable” than the March 2021 move because a bigger portion has occurred during U.S. trading hours
- Japan’s fiscal new year is unlikely to drive significant demand for Treasuries, but marginal demand from Japanese insurers and pension “could help the curve bull- or twist-flatten”; higher funding ratios for U.S. pension funds should also keep flattening pressure on the curve
- 2s10s “hasn’t flattened commensurately with the rise in yields” for three reasons, first and third of which are worth fading
- Focus on QT, however Treasury is likely to fund shortfall at short end
- Pricing in a higher long-term neutral rate
- Decrease in flight-to-quality premium to a degree that appears excessive
NatWest Markets (Jan Nevruzi, March 24 report)
- “Next major theme for the markets will be rising fears of a recession as the Fed hikes into decelerating growth, potentially supporting a peak in rates into this summer”
- Revised year-end yield forecasts:
- 2-year 2%
- 5-year 2.8%
- 10-year 2.55%
- 30-year 2.45%
TD Securities (Priya Misra, others, March 25 report)
- Expects 50bp rate hikes in May and June, 25bp at each meeting from July to December and in February 2023
- Expects QT announcement in May with three-month phase-in to caps of $60b and $30b for Treasuries and MBS
- Revises year-end forecast for 10-year Treasury yield to 2.65% and favors short 5s on 2s5s10s fly
- “We don’t think the market is fully pricing in the supply implications of balance-sheet runoff of about $1t per year
Source: BBG
