Treasuries Face High Bar for Yield Liftoff in Calmest-Ever Trade

Bond strategists see Treasury yields ending the year marginally higher, but even a modest uptick faces stiff headwinds in a market that’s almost ground to a halt.

The median forecast is for the 10-year yield to climb 10 basis points from its current 0.65% level, with the highest projections barely cracking 1%. That view hinges on a continued recovery in growth, thanks in large part to the Federal Reserve’s unprecedented monetary support. Some may also be banking on the U.S. election to clear the way for more fiscal stimulus.

The stretch run to the vote begins in earnest with Tuesday night’s debate between President Donald Trump and challenger Joe Biden, which has the potential to roil polling that shows Biden with a solid lead. A Democratic sweep in November that leads to higher spending is seen as jolting yields the most. In a sign of what’s at stake for the consensus call for steeper borrowing costs, data set for release Friday are projected to show job growth moderating.

“There really seems only two paths for Treasury yields now, sideways or higher,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “Given the amount of fiscal and monetary stimulus and supply the market is getting, we’d expected modestly higher Treasury yields.”

Treasuries Face High Bar for Yield Liftoff in Calmest-Ever Trade

Even so, Rajappa and her team just lowered their 10-year yield forecasts by 20 basis points for each quarter through mid-2021. That’s after the Fed this month made clear that it will keep policy rates near zero for several years. The analysts also point to a mix of disinflationary forces -- including consumers’ caution amid the pandemic -- and the likelihood that the Fed would act to avert a significant jump in yields. SocGen now predicts the 10-year yield will end this year at 0.80% and June at 1%.

The 10-year yield has swung during the second half of 2020 between 0.50% and 0.79%. Even four straight weeks of sinking U.S. share prices only sparked a mild haven-bid for government debt. Nor did a week of historically large note auctions leave a lasting mark. Volatility in Treasuries has never been lower.

The face-off between Trump and Biden could spark volatility if it moves the polls, Rajappa said. And the battle over the open seat on the Supreme Court after the death of Justice Ruth Bader Ginsburg has added angst, with both parties making it a focus of the campaign, and potentially taking attention away from negotiations over relief spending.

“Polls suggest debates remain central to how voters form a view,” JPMorgan Chase & Co. strategists including Joshua Younger wrote in a note. Analysis suggests “statistically significant movement of the polls following the first debate, and to a lesser extent, second and third, in both directions is reasonably common.”

What to Watch

  • The economic calendar
    • Sept. 28: Dallas Fed manufacturing activity
    • Sept. 29: Advance goods trade balance; wholesale/retail inventories; S&P CoreLogic home price data; Conference Board consumer confidence
    • Sept. 30: MBA mortgage applications; ADP employment change; GDP; MNI Chicago PMI; pending home sales
    • Oct. 1: Challenger job cuts; weekly jobless claims; personal income/spending; PCE deflator; Bloomberg consumer comfort; Markit U.S. manufacturing PMI; construction spending; ISM manufacturing
    • Oct. 2: Nonfarm payrolls; University of Michigan sentiment; factory/durable/capital goods orders
  • The Fed calendar:
    • Sept. 28: Cleveland Fed’s Loretta Mester
    • Sept. 29: Michael Held, executive vice president of the New York Fed, discusses the countdown to Libor; New York Fed’s John Williams speaks at the 2020 U.S. Treasury Market Conference; Philadelphia Fed’s Patrick Harker; Vice Chairman Richard Clarida moderates panel at Treasury Market Conference; Williams; Fed Vice Chair Randal Quarles has two appearances
    • Sept. 30: Minneapolis Fed’s Neel Kashkari; Fed Governor Michelle Bowman
    • Oct. 1: Williams has two appearances; Bowman
    • Oct. 2: Harker
  • The auction calendar:
    • Sept. 28: 13-, 26-week bills
    • Sept. 29: 119-, 42-day cash-management bills
    • Oct. 1: 4-, 8-week bills

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