Pandemic to Drag Treasury Yields Even Lower for HSBC’s Major

(Bloomberg) -- This year’s virus-driven rally in Treasuries is over for most analysts -- but not for HSBC Holdings Plc’s contrarian bond chief Steven Major.

He sees the yield on benchmark U.S. Treasuries dropping to end the year at 0.5% -- that’s the lowest forecast in Bloomberg’s bond yield survey, which sees it climbing instead to around 0.9%. The argument is based on the economic fallout from the coronavirus keeping Federal Reserve rates near zero, said Major, the global head of fixed-income research at HSBC.

“That’s like a magnet pulling yields across the curve down,” Major said in an interview with Bloomberg Television Wednesday.

The rush for haven Treasuries in market turmoil has driven benchmark yields down by more than 130 basis points this year, though the move has petered out this month after huge stimulus measures from central banks and governments. The yield was at around 0.60% Wednesday, ahead of the Fed’s policy announcement.

This isn’t the first time Major’s view has been an outlier. He stuck to a yield forecast for 2.1% in the middle of last year when other analysts were slashing theirs to below 1%. He stood out in 2014 for correctly predicting that yields would drop to about 2.1%, while the median forecast was 3.4%.

The U.S. central bank’s long-run equilibrium rate of interest that neither spurs nor hinders economic activity, or R-Star, is also likely to be a lot lower than initially estimated, according to Major. While the Fed was looking at levels around 50 basis points in the medium to longer term, it could now likely be a negative number, he said.

“The pandemic impact has taken R-Star down a long way,” London-based Major said. “If that’s the case, we need to be resetting our sights on the range for the whole Treasury curve. So I think we will now live below 1% for a very long time.”

U.S. PREVIEW: Fed to Ponder More Action, Not Exit Strategy

Data out Wednesday showed the U.S. economy on the brink of a recession. Fed policy makers will likely reassess the stimulus measures in place rather than an exit strategy this week.

“If you are in a long slow period of growth or even if you have a long period of recession then maybe you should consider negative rates,” Major said. “I’m not saying they are going to do it today but I am just going to throw it out there.”

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