Late last month, BofA marked down their forecasts for DM bond yields in a note called “Marking to misery”.
The rationale went beyond trade escalations, although the expected deleterious impact of tariffs on global growth certainly played a part.
“It would be simplistic to blame these forecast revisions purely on the latest chapter in the trade war saga”, the bank wrote, adding that “central banks globally have shifted to a dramatically more dovish tone and inflation has continued to disappoint”.
That was on May 22. Since then, the inflation outlook has deteriorated further and central banks have leaned even harder into the dovish pivot.
Read more: Misery.
Tellingly, bund yields fell to record lows below -30bps following BofA’s “misery” note. “Crucially, we see Bund yields at risk of reaching new lows of -25 bp in Q3 as we approach crunch time on accumulated event risks”, the bank said. Bunds didn’t wait around on Q3. 10-year German yields were at -25bp by June 7. It won’t be long before Germany’s entire bond market is trading with negative yields (see bottom pane in the following visual):
10-year US yields have fallen more than 30bp since BofA “marked to misery” in late May.
Well, on Wednesday, Goldman is out slashing their G-10 yield forecasts – again.
The bank delivers the news over the course of five pages, but the gist of it is simple enough. “First, a shift in a dovish direction by the major central banks that is unlikely to be reversed soon imparts a bullish bias to yields [and] second, many risks that are weighing on yields, from the US-China trade war to Brexit, are unlikely to be fully resolved in the near term, resulting in yield distributions skewed to the downside”, the bank writes.
Here’s a breakdown of the decline in US and German yields by macro factor (the bank adds the usual caveat: the macro factors are “based on an interpretation of principal components of several market variables, and are imperfect proxies for assessing actual contributions”):
(Goldman)
Goldman notes that the US economy would have to produce “reassuring growth data” and the trade tensions would have to fade away in order to compel the Fed to stop easing once the cuts start. Meanwhile, in Europe, the bank says “a combination of soft domestic growth, loss of external momentum (in the US and China), drags from trade conflict, and a weak inflation outlook are all likely to push the ECB towards easing as well.” They cite “similar factors” at work across the developed world.
The revisions are aptly described as “substantial”. Goldman strikes a conciliatory tone, noting that the new forecasts are “both an acknowledgement of the changed circumstances… and a sense that the near-term trajectory of many of these drivers makes fading the bond rally a difficult proposition.” Here is the short version:
Our key 10y yield projections for YE2019 are as follows: USTs at 1.75%, Bunds at -0.55%, Gilts at 0.70% and JGBs at -0.30%. Across G10 markets, we expect yields to be lower by 15-40bp by year-end. We project steeper yield curves in the US (and to a more limited extent in Australia and Canada), whereas yield curves will likely trade with a bull-flattening bias in most of Europe and Japan.
Those projections for bunds and JGBs are pretty remarkable and the bank acknowledges as much. “Our year-end forecasts are below market forwards by about 20-35bp across the complex”, Goldman writes.
(Goldman)
I suppose we’re all Albert Edwards now.
