On Monday evening, Goldman had a “simple” message: “The market is moving from TINA (There Is No Alternative) to FOMO (Fear of Missing Out)”.
With US equities having climbed to new highs on the back of trade optimism and better-than-feared earnings from corporate America (profit growth declined in Q3, but by less than expected), market participants are coming around to the notion that some how, some way, the global economy will dodge an outright downturn.
The good vibes have manifested themselves in any number of ways, the most visible of which was last week’s bond rout, during which 10-year yields in the US surged more than 20bps, and TLT suffered its largest outflow on record (at more than $1.2 billion).
In the spirit of the moment, BofA’s latest Global Fund Manager survey echoes the FOMO theme.
“The bulls are back, global recession concerns vanish and ‘Fear of Missing Out’ prompts [a] wave of optimism and jump in exposure to equities and cyclicals”, the bank’s Michael Hartnett writes. Cash levels dove and the pro-cyclical rotation that’s on everyone’s lips was readily apparent.
Fund managers are now widely on board with the notion that the global economy could be on the verge of a turnaround, and wouldn’t you know it, the bank’s rates team is out revising their year-end yield targets for DM bonds.
Earlier this year, BofA “marked to misery” on several occasions, slashing their yield forecasts in keeping with the inexorable bond rally that crescendoed in August. “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 wrote that month, as bund yields were in the process of falling to -0.70%, while 10-year yields stateside dove through 1.50%. “As a result we have not been bullish enough”.
Fast forward less than three months, and now desks are confronting a reality where they may have a hard time getting bearish enough on duration, assuming all the good news everyone seems to be expecting actually materializes.
“We update our US, Euro Area and UK rates forecasts and now expect 10Y rates at 2.00% in the US, -20bp in Germany and 80bp in the UK by end-2019”, BofA writes on Tuesday.
“Relative to our more pessimistic revision in August, the US and China are working to de-escalate trade tensions, no-deal Brexit risks have been banished for now, global data have started to stabilize, and central banks have shifted from dovish to neutral policy stances”, the bank goes on to say. “Technically rates markets remain vulnerable and residual longs could still be cut, which combined with hopes for a more substantial deal make us bearish into year-end”.
As you can see from the table, those are substantial upward revisions.
Still, the bank is skeptical about the rampantly proliferating optimism and concurrent bearish bond view. “We expect US, EU and UK rates to trade below current forwards for most of 2020”, the bank writes, citing the potential for higher yields to tighten financial conditions and thereby remove a tailwind from the US economy, a Fed that’s still much more inclined to cut rates than raise them (i.e., the reaction function is asymmetric and the bar for another cut is much lower than for a hike) and political uncertainty.
For his part, SocGen’s Jorge Garayo said Monday that while it might make sense “fundamentally” to re-enter duration longs on the heels of the sharp rise in yields, “it is very possible that the market sell-off continues”.
“Notwithstanding Trump’s twitter feed before any agreement comes”, he added.