‘We Have Not Been Bullish Enough’: Misery, Redux

Back on May 23, Bank of America slashed their year-end yield targets for DM bonds across the board.

“Following the latest tariff developments, our year ahead numbers imply a best case scenario for a resolution of the US-China trade dispute, which seems unrealistic”, the bank lamented, in a fatalistic-sounding note called “Marking to misery”.

At the time, their forecasts for DM yields seemed bullish.

Read more: Misery.

Now, in the wake of a truly epic bond rally, those same targets look outright laughable, and we don’t mean that in a derisive way. We’re all marveling at the scope of the rally.

For instance, BofA’s year-end forecast for 10-year US yields was 2.60% as of the May update mentioned above. And that was a downward revision from 3.00%. Bund yields, the bank said, would likely sit at -11bp at year-end, but they warned about a possible “overshoot” to the downside which might push 10-year German yields to “-25 bp in Q3”.

Fast forward less than three months and 10-year US yields fell below 1.50% while bund yields dropped to -0.70%, amid a panic bid for bonds, spurred along globally by growth worries, dour data, escalating trade tensions and expectations of policy easing, and turbocharged in the US by term premia spillover and receiving flows.

30-year yields stateside fell below 2% this week, while the BoJ struggled with JGB yields that broke through the lower-end of the YCC band. Benchmark yields in Australia hit new lows, and the New Zealand 10-year dropped below 1% for the first time.

On Friday, BofA is out updating their yield forecasts. “Marking to misery”, as the bank called it in May, is now “Battered and bruised: buy bonds”.

BofA’s new range for the 10-year is 1.1-1.4% “if the lower growth expectations and global low rate environment persist”.

(BofA)

The bank says the 30-year has the most scope to rally for a trio of reasons. “Asset allocation flows domestically and globally have been prominent YTD, which was exacerbated by recession risk headlines recently”, BofA writes, adding that “positioning is approaching max longs in the belly [and] the inverted curve has diverted flows into the very front end and very long end due to the lack of positive yielding and positive carry haven assets globally”.

They also cite the familiar “duration demand created when we reach new lows in yields, due to the negative convexity portfolio hedgers such as the MBS community”. Receiving flows have clearly been at play this month, something we’ve mentioned on too many occasions to count.

(BofA)

On bunds, BofA cites the German economy and new, more aggressive forecasts for the ECB. The bank calls hopes of a second half growth rebound in Germany “ever more elusive” and notes that their European economics team now sees “a small QE of €30bn/month over 9-12 months, in addition to the 20bp rate cut they had penciled in for September”.

The bottom line after the last couple of weeks is that while there are those who will claim to have seen the recent rally in bonds coming, you’d be hard-pressed to find anyone whose name isn’t “Albert Edwards” who has a documented history of calling for the kind of plunge in yields that’s actually played out.

Even those who had the direction right are playing catch up to the ferocity of the move.

“We have tried to express a bullish view versus forwards in EUR since late May, and in the US since early June [but] we have been consistently surprised negatively by the trade war escalation, and markets have been left wanting by central banks”, BofA says, flatly. “As a result we have not been bullish enough”.

Again, nobody has.