Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Column: Bonds wobble just as forecasters back off

EconomyAug 27, 2021 04:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly/File Photo

By Mike Dolan

LONDON (Reuters) - Just as Wall St firms finally throw in the towel on punchy year-end bond yield forecasts, the market has a wobble.

It was more a sulk than a tantrum perhaps. But the biggest weekly rise in 10-year Treasury yields since March was curious as it came just as frustrated forecasters scaled back their long-standing year-end bets.

Like many market moves in quiet August trading, the rationale for the 15 basis point pop in 10-year yields was more sketchy than it first appears.

There was obviously last minute bracing for whatever Federal Reserve chief Jerome Powell will say later on Friday at this year's virtual Jackson Hole central bank event. Upbeat economic outlooks from European Central Bank officials were also cited as nudging euro and global bond yields higher more generally.

And yet Powell is unlikely to be specific about when Fed cuts its bond buying right now.

What's more, it's also unclear whether early tapering into an economic slowdown would lift or sink long yields anyway. Many feel a move now merely reveals cold feet at the Fed on running the economy "hot" and could end up being a "hawkish error" that just subdues the growth and inflation outlook down the line.

But bond moves appear to be jostling for position rather than necessarily reappraising the economy.

To the extent that the anti-consensus summer swoon in Treasury yields was a result of excessive one-way bets and a overcrowded trade early in the year, then the more measured forecasts may signal clearer air. Gone are the ubiquitous 2% yield year-end calls of the spring.

This week Bank of America (NYSE:BAC) became the latest Wall St firm to pare its end-2021 10-year Treasury yield forecast to 1.55% from 1.90% previously. Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) trimmed theirs by similar amounts to 1.6% and 1.75% respectively this month too.

These follow the dramatic 60 basis point slide in 10-year rates from the March peaks to as low as 1.12% this month. That's a huge move for a rate so central to how world financial markets are priced - not only the blizzard of domestic fixed income securities and derivatives but stock valuations, emerging market borrowing or even currency carry trades.

And yet just as those forecasts came through, there were signs the pendulum may be about to swing back again.

In fact, Bank of America's August global fund manager survey had "long US Treasuries" already identified as the fourth "most crowded trade" even as the balance of funds expecting a strong economy had almost halved over the month and a whopping 84% say they already expect the Fed to taper by the year-end.

Speculative futures market positioning published by the CFTC shows net long positions in 10-year futures building over the past six weeks - even though long positions have dominated for most of the past year with the exception of the March sell-off.


So has the outlook for the most important borrowing rate in the world just come down to second-guessing everyone else or do economic and policy fundamentals still hold sway?

Point forecasts for markets are notoriously difficult at the best of times, never mind in an unprecedented pandemic shock. And of course circumstances alter cases - forecasts change as new information arrives and that's what should be the case.

But market positioning itself seems to be the only real change.

A bigger problem for forecasters is that there is really no playbook for the sort of extraordinary global economic emergency that's just unfolded and therefore little conviction among policymakers, business or investors on how it will all play out. Not everyone's sure we're through this shock yet or what legacy of the economic rescues applied will leave.

Is COVID-19 over or will variants linger as economic dampeners for years? Is higher inflation now embedded or do we quickly return to pre-pandemic norms? Has central bank bond buying worked as a policy and is it here to stay as government debts rack up? Does bond buying raise or lower bond yields anyhow?

And as Russell Investments strategist Andrew Pease opined last month: "It may seem obvious, but has quantitative easing actually lowered or raised bond yields over time?"

He reckons the only way to answer that is to look at where rates would be if there has been no such monetary intervention after the banking crash in 2008 or the euro crisis or during the pandemic last year. And he posits the economic ramifications of allowing those crises play out without that monetary action could have seen yields even lower than they are today.

Pity poor bond forecasters then.

Maybe the best thing is to leave well enough alone.

Last December, the median 12-month forecast of more than 60 economists polled by Reuters was for 10-year Treasury yields of 1.20%. With four bumpy months of 2021 to go, it will be interesting to see how that one pans out.

(by Mike Dolan. Additional chart by Jamie McGeever; editing by David Evans)

Column: Bonds wobble just as forecasters back off

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email