US bond yields may break out ‘on downside’ warns Raiffeisen

Weaker than expected economic recovery could see US 10-year bond yields fall rather than rise, according to latest quarterly analysis from Raiffeisen Capital Management.

In its May report on bonds, the Austria based manager said that despite ongoing tapering of the asset purchase programme by the US Federal Reserve, yields on US government bonds have fallen since the start of 2014.

“To the surprise of almost all market participants, it now appears that US yields are going to break out on the downside and not on the upside,” the manager wrote.

“There may be several reasons for this. For example, recent weeks were mostly characterised by weaker US data on the economy (even though this is generally ascribed to the impact from the weather). The situation was exacerbated by the geopolitical tensions in Ukraine.

“Most important, however, is that almost all market participants are more or less positioned for sharp increases in yields. Almost all mainstream economists also harbour these expectations and no one is predicting a recession in the USA.

“Economic experts at a renowned major US bank actually think that there will possibly not be another recession in the USA for the next 10 years. This harkens back to the euphoric mood from the end of the 1990s, when there was a widespread opinion that the Fed had managed to successfully ‘eliminate’ cyclical swings in the economy. Shortly thereafter, of course, this turned out to be pure fantasy.

“Even though the USA is the industrialised countries with the best economic prospects for the foreseeable future, a boom lasting that long is unlikely. One should keep in mind two things in this regard: The last recession happened quite some time ago, and the next one thus seems almost ‘overdue’. More importantly, the current situation is the result of the largest monetary and fiscal stimulus ever seen and judged against this as a yardstick, growth still looks rather paltry.”

Raiffeisen also notes a technical anomaly being seen in the market for US debt.

It said that Belgium has become the third largest holder of US debt, some $380bn worth or equivalent to half of Belgian GDP. Since October 2013 purchases have hit some $200bn, and the question being asked is who is behind the purchases being done by Belgian banks.


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