Bond Bull’s 1% Treasuries Yield View Is Suddenly Looking Prescient
(Bloomberg) -- Steven Major has long been known as a bond-market bull. Right now, he’s excelling himself.
For months, the HSBC Holdings Plc veteran has been calling the 1% Treasury yield that’s only now coming into the market’s focus. There are few who are quite as bullish -- the median forecast of his peers is 1.8% and there are more than a dozen others who expect 2% or more.
“We are not forecasting 1% just to get attention,” Hong Kong-based Major, 57, said in a phone interview. “We wonder where the 2% forecasts come from, as it doesn’t fit with our models.”
The likely path of U.S. yields is central to a debate currently obsessing markets: whether the signs of accelerating inflation around the world are transitory or more lasting, and how central banks will respond to price pressures during a post-Covid economic rebound. For Major, the most positive signs of recovery may have already passed, as a global resurgence of coronavirus infections hobbles the outlook.
“To me, the likelihood is that you will see the loss of momentum in the recovery and in the data,” Major said. “The sentiment data might have peaked. There’s also very strong newsflow about Covid and what it could do to growth. That’s the current narrative.”
Growth fears erupted this week as the spread of the virus calls into question rosy economic forecasts. Yields have cratered, with the benchmark 10-year Treasury rate trading at 1.14% Tuesday, extending its decline to 63 basis points from March’s 14-month high.
Suddenly, 1% doesn’t look out of reach -- and others are lining up behind Major’s call.
There’s a theme to Major’s rationale that’s key to his prognosis. With governments grappling with debt loads that ballooned at the start of the pandemic, it will be difficult for central banks to push rates much higher from here, he says. And that’s even before long-term structural factors such as demographics and technology, which he sees as deflationary, are thrown into the discussion.
Even if the Federal Reserve lifts rates to nip inflation in the bud -- a view strengthened by data last week showing core consumer price inflation clocking up its largest advance since November 1991 -- it will be a pre-emptive move. And that means the maximum level to which rates will rise is likely to be lower than what the market is pricing.
This week’s market moves vindicate Major who, by his own admission, ate humble pie earlier this year as Treasury yields soared with reflation trades. Yet even his updated forecast remained the lowest among the peers compiled by Bloomberg. And he stuck to his guns in March.
2017 was also a humbling year. Major forecast the yield on the benchmark note would end the year at 1.6%, before revising that up to 1.9% in June. The securities ended the year yielding 2.41%.
But during a bond-market career that’s spanned 35 years since his graduate trainee days in 1986, Major says giving clients the right framework to work with is more important than being spot on with his predictions.
That approach has helped get him on the right side of the market over the two decades he has spent at HSBC. In 2012, he correctly forecast the yield on two-year Spanish notes, then at 6%, would fall toward 2% following then-European Central Bank President Mario Draghi’s “whatever it takes” speech.
In 2014, he was proved right again when he predicted the yield on 10-year Treasuries would drop to 2.1% at a time when it was 3% and the market consensus was 4%. And he caused a stir in the same year when he said the German benchmark bund yield would drop to 1%, well below the market consensus. Major was among the most bullish forecasters that year.
“Some good feedback we heard is that people like the way we have a framework and that we are consistent,” Major said. “We are living in a world with huge uncertainty. If we were frightened about being wrong, we wouldn’t be able to do our work.”
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