It was Morgan Stanley’s Matthew Hornbach who once said, “history has shown consensus estimates for Treasury yields are usually wrong.” “Everyone,” he wrote, in a 2018 note, “understands that accurate point forecasts rarely occur.”
I’ve always liked that refreshingly candid assessment, particularly coming from someone whose job it is to forecast yields. It reminds me of Will Ferrell’s Saturday Night Live audition, during which, while playing a suburban dad at a cookout, he says, “Golf’s a funny game, isn’t it? It’s hard, it’s expensive and yet we keep playing it.”
Hornbach is still playing the futile forecasting game. In 2024, Morgan Stanley expects US 10-year yields to be 4.20% by the end of H1 and 3.95% by year-end. The bank sees “more bang for the buck in bullish duration trades, rather than positioning for curve moves.”
“Cooling growth, labor markets and inflation, a rate-cutting cycle starting in June 2024, more flexible Treasury supply, and a return of buyers missing in H2 2023” should be conducive to “lower rate expectations and term premiums,” Hornbach said, adding that “fiscal policy, which played a key role in lifting growth and yields higher in 2023,” probably won’t be a factor ahead of the US election.
Notably, buying 30-year Treasurys outright is among the bank’s top trades in rates. At least for the first half of the new year.
“In H1 2024, we see the decline in yields led by the back end, modestly bull flattening the curve,” Hornbach wrote, in the course of suggesting that softer growth and a less aggressive coupon strategy from Janet Yellen should allow bonds to “price out the recent themes” which bear steepened the curve from August through October.
In H2 2024, rate cuts will dominate, triggering the more traditional late-cycle bull steepener, according to Hornbach, who also detailed alternative scenarios to the bank’s baseline which calls for four Fed cuts commencing from June. In a “bull case for the US economy and bear case for Treasurys,” the Fed would hike four times in 2024, bear flattening the curve, and leaving 10-year yields at 5.05% by year-end. In a bear case for the economy and bull case for Treasurys the Fed would cut rates by 350bps(!). That’d obviously bull steepen the curve, but would nevertheless leave 10-year yields sharply lower at just 2.50% by year-end.
As Morgan Stanley’s rates team dryly put it, “we see a wide range within our bull and bear case scenarios,” commensurate with “the wide range of possibilities.”
Meanwhile, Hornbach’s counterpart at Goldman, Praveen Korapaty, has a different take. A robust US labor market and sticky inflation will leave 10-year US yields at 4.50% or higher for the next three years. 10-year Treasury yields should end 2024 at 4.55%, according to Goldman.
“Compared to prior end-of-cycle bond rallies, higher inflation and low unemployment set a higher bar for deep ‘normalization’ rate cuts, while term premia could remain sticky given bond supply and fiscal concerns,” Korapaty said, adding that a “soft landing and small policy rate changes in either direction should suppress” rates vol while reduced reliance on bills may “substantially” increase note and bond supply.
Goldman, you’ll note, expects just one Fed cut in 2024, and not until Q4.
Not exactly a propos of the post, but not wholly non propos either . . .
Talking with various cronys, not wizened nanogenrians but still guys with 30, 35 years in the markets under their Sansabelts, and we mostly agree that this has been the most confusing year or so.
The Tech Bubble/Bust market was appalling, but directional and sustained. It went one way for years and steamrolled everyone who didn’t believe, then reversed for years and extincted everyone who believed.
The GFC market was predictable even if the scope and scale of the reckoning was so much worse than most predicted. You weren’t surprised that the stock went down, just that it went down to Great Depression valuations.
The Pandemic market was not too terribly hard to figure out at first. Virus hit, stocks plunged, then you saw the Fed unholstering its cannon and did some quick research on SARS antivirals, it was pretty clear what to do. Then when valuations were stratospheric and inflation heading for orbit, and you saw the Fed unholstering its other cannon, it was again pretty clear.
Now valuations, inflation, rates, growth, earnings, spreads, etc are all broadly in the realm of normal, or headed there, using a multi-decade sense of normality.
You’d think “normalizing” would mean “easier to figure out”, but I guess it’s easier to figure out things that are at one extreme or the other.
Of course some things are not altogether “normal”. Like domestic politics, geopolitical risk, and the Federal deficit. But those are the things that most investors have been trained to ignore, as their impact on markets is usually fleeting. Remember when the WTC was destroyed, when the US launched its biggest war since Vietnam, when Trump swept Hilary; sure. Remember the major lasting impacts on the markets; um, not really. Professional investors know better than to be distracted by such.
Sigh. 2023 has been a very interesting year, but when the most successful “strategist” is the one making couple-week tactical calls on reversals from extreme levels on allocation, trends, and greeks, you know it hasn’t been an easy year.
Even allowing that forecasters have to forecast, in light of the rarity of accurate point estimates combined with the severe limitations of wildly divergent bull v bear scenarios “commensurate with the wide range of possibilities,” perhaps these analysts should heed Mr. Ferrell and get off the goddamn shed.