HSBC Bond Bull in Retreat With Inflation in Driver’s Seat

(Bloomberg) -- The surge in inflation is forcing HSBC Holdings Plc’s renowned bond bull Steven Major to raise his year-end yield forecasts. But he and his team still maintain that any rise will be short-lived, sticking to the long-term view that ultra-low rates are here to stay.

HSBC today raised its year-end forecast for U.S. 10-year Treasury yields to 1.5% from 1%, after holding that call since February. It’s currently around 1.55%. But the bank kept its end-2022 forecast at 1%. The passage of time means the projections for 2021 now fall under the one-to-three months tactical horizon, which requires the bank to mark-to-market its forecasts, said Major, whose consensus-defying calls have been largely vindicated over the years. The longer-term outlook doesn’t change.

“With end-2021 in sight, growth expectations are lower, and inflation expectations are in the driving seat,” Major said. “But our forecast and our methodology are very much looking at the longer-term drivers. There’s a difference between predicting climate change and a weather forecast.”

HSBC’s forecast changes came amid heightened concerns that rising consumer prices may not be as transient as central banks previously thought. U.S. consumer prices data today outpaced forecast and will likely reinforce the Fed’s inclination to soon start tapering its asset purchases.

The recent inflation scare was driven by supply chain strains, surging commodity prices, post-lockdown demand, ongoing stimulus and labor shortages. Benchmark 10-year Treasury yields have climbed above 1.6% this week as traders bet the Federal Reserve will tighten policy sooner than expected.

Long-Term Bullish

But Major still believes the surge in inflation will be transitory. While he accepts there is a potential for hawkish data and for yields to overshoot in the near-term, he expects them to eventually come back down. The reason? It will be difficult for central banks to push rates much higher from here as governments grapple with debt piles that ballooned at the start of the pandemic. And that’s even before you take into account long-term structural factors such as demographics and technology, which he sees as deflationary.

“I understand people are concerned about inflation, and I’m not being dismissive about it,” Major said in an interview. “But I just think that what drives the current narratives is not going to change our longer-term outlook. Something temporary should not change one’s fundamental view. We will only change our view on this if we can put together a constructive piece of work that shows all the central bank’s models are wrong.”

With the revision, Visa Inc replaces HSBC as the biggest bond bull in the market for this year, according to analyst forecasts compiled by Bloomberg. 

HSBC also raised its year-end forecast for German bond yields by 20 basis points to minus 0.30% and for U.K. gilts by 50 basis points to 1%. But it sees both yields falling to minus 0.50% and 0.75%, respectively, by the end of 2022. 

So are we looking at a repentant bull? Hardly. 

“Higher yields may embolden the near-term bear case for bonds,” Major said, adding that they “do not change our long-term forecasts,” Major said.

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