There’s Little on the Bond-Market Horizon to Trigger Higher Yields

(Bloomberg) -- There’s a lack of catalysts on the horizon at the start of 2019 to reverse the slide in Treasury yields as global economic growth wanes and investors shift toward the view that further Federal Reserve tightening would be a mistake.

Traders are now wagering that the Fed will forgo hiking interest rates this year and are even starting to price in the prospect of a cut in 2020. Fresh evidence of slowing output Wednesday from China and Europe, combined with weakness in assets from stocks to high-yield debt, are highlighting the risk of even a U.S. downturn.

Bond bears were frustrated in 2018 as the 10-year Treasury ended the year not far above where it began even as the economy logged 3 percent growth, inflation edged higher and the Fed tightened four times. Treasuries wound up producing a fifth straight annual gain on a total return basis. With investors seeking a haven, the 10-year yield sank to 2.62 percent Wednesday, touching the lowest since January 2018. The rally in bonds gained steam as Apple Inc. cut its revenue forecast.

John Herrmann at MUFG Securities Americas Inc. sees little upside to yields this year, as he expects gross domestic product to cool amid inflation to remain tepid. In his view, if the Fed lifts rates twice in 2019, as it signaled last month, and sticks to its current pace of balance-sheet runoff that may amount to a “policy mistake” that undermines riskier assets and boosts Treasuries. He forecasts the 10-year yield at 2.76 percent at year-end.

“Treasuries yields just can’t move materially higher,” he said. “There are significant headwinds to growth, with incremental benefits of fiscal policy diminishing after this quarter.”

Gloomy Vibe

The gloomy vibe is a global one. A closely watched Chinese gauge showed factory conditions slumping in December amid trade tensions. Manufacturing sectors in Italy and France shrank, according to the latest readings.

Ten-year German bond yields fell to 0.15 percent Wednesday, the lowest level since 2016.

There’s a risk that markets are overshooting. For one thing, the U.S. and China are scheduled to hold trade talks next week. And maybe the U.S. central bank’s stance isn’t so off base. Fed Chairman Powell is scheduled to speak Friday, giving the market a fresh opportunity to adjust to his views.

And some investors are sticking to bets on higher yields. Fast-money traders, made up of hedge funds and other speculators, still hold close to record shorts on 10-year futures, according to U.S. Commodity Futures Trading Commission data through Dec. 18.

Marty Mitchell, an independent strategist who’s been charting Treasuries since the 1980’s, says he sees no sign of the slide in yields losing its momentum. Short-term moving averages on the 10-year yield would have to begin to move above longer-term levels, he said.

The 5-, 10- and 30-day moving average of the 10-year yield are at 2.72 percent, 2.75 percent and 2.89 percent, respectively.

“Technically, the momentum trends to the downside in yields, oil and share prices haven’t started to turn yet,” Mitchell said. “It’s the proverbial ‘Don’t step in front of the moving trend’ environment. You’d be jumping in front of it at your own peril.”

--With assistance from Alexandra Harris.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Vivien Lou Chen

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