Global yields: how high can they go? – Westpac

Analysts at Westpac offered their take on the recent upsurge in the US Treasury bond yields and provided a brief insight about the possibilities on any further rise.

Key Quotes:

US 10yr yields underwent another significant increase last week. They have now risen by almost 50bps since August and are threatening to break above 2% for the first time since July.
 
The market has now fully unwound its heightened fears around global trade and growth. The question is whether it has now priced-in too much good news, or whether the bearish bond market correction will be sustained?
 
While Westpac remains sceptical of the positive growth hopes supporting record highs in US equities, from a bond market perspective, the answer really comes down to your medium-term FOMC expectations.
 
Having delivered 75bp of easing over the three meetings to October, the FOMC has made clear that they intend to pause and reflect on the state of the economy in December. The data remains soft, but as yet has not pointed to a decisive shift in growth below trend. We expect employment to slow further and investment to remain weak. Consequently, despite market optimism over trade, rate cuts will most likely again be on the agenda in 2020 – in March June & September.
 
So that talks to supportive medium-term risk rewards for USTs. The immediate outlook, however, is more clouded. Fed Chair Powell’s speech this week will support the optimistic/bearish viewpoint, while it is harder to assess likely market responses to Mr Trump’s speech at the Economic Club of New York on Nov. 12. The market has been ignoring more pessimistic trade comments and data outcomes, so the risk is that 10yr USTs sustain their bearish momentum. We think they will end up “oversold” and we remain better buyers on dips, however, we have previously been too quick to expect “value” considerations to re-exert themselves and prefer to wait until yields begin to consolidate the recent shift before re-assessing the new tactical trading range. A breach of 2% opens the way to 2.15-20%.