With the US 10yr bond yield having collapsed by as much as 20bps over the past few sessions, Westpac’s Financial Markets Strategy team provided their take on how much lower can US bond yields go and said that there is little to be gained from pushing against the current trend.
“As we noted in our introductory paragraph, current Fed pricing for 2019 reflects 2 rate cuts and a greater than 50% chance of a third, and so the market’s Fed call is very similar to our own forecasts of a cut at each remaining meeting this year. That suggests that valuations across the curve are very tight. However, price action this year has paid those that were either long or square and tactically bought the dip. The circumstances behind that sentiment and momentum only increased, so we see little reason to be sceptical about further positive momentum in bond markets this week. Even so, it is timely to ask how low US 10yr yields can go?”
“The current yield is now only a handful of basis points off the all time low set in 2016. Yields have retraced all of the move higher post Trump’s election and are now significantly more expensive relative to terminal Fed Funds expectations than they were at that time. However, 10yr yields have sustained current relative valuations previously. So, with the signalling from the 2-10yr curve that has been highlighted in recent weeks, combined with the deterioration in global geopolitics, we think yields can sustain around 1.5% and could move lower if the Fed signalled that the current cycle might be extended beyond its current “mid-cycle” pre-emptive categorisation.”