The year 2021 is being complex for the asset considered risk-free par excellence: the US 10-year bond. In the first week of the year, the title exceeded the 1% profitability level for the first time in 9 months, and this was only the beginning of an increase that took the bond to 1.74% profitability, on March 31.
This rally in its yields was based on the recovery expectations that were formed with the arrival of the vaccine, and the rebound in expectations and in inflation data that were taking place.
With rates that have reached 5.4% in the United States, and expectations of 2.54% for 10 years from now (the 5y5y inflation swap in the country reached this level on May 14), it seemed logical that the market demanded a higher yield from the bond in order to consider it an attractive investment.
That, at least, is the opinion held by most analysts, who expect increases in the yields of US debt during the next few quarters, which should take the title to 2% in the third quarter of next year. However, since the T-Note reached annual profitability highs in March , it has not stopped falling, and has taken the title to the 1.2% environment in which it currently moves, putting in doubt the forecasts of analysts, who for this quarter already expected a bonus of around 1.7%.
From current levels, if the forecasts of the consensus of analysts collected by Bloomberg are met , investors who have exposure to the US bond will see their investment deflate at a rate that, in the case of fixed income, will be accelerated.
The consensus places the bond at 1.68% of profitability this quarter, and at 1.79% for the next one . By price, this would mean losses of 3.24% in the shortest term. The forecast of 2% profitability for a year from now, in the third quarter of 2022, would mean losses of 7% with the title in that period.
For those analysts who believe that the bond may reach a level of 2.3% in the coming months, the price drops would be 8.13%. The highest profitability forecast that any analyst manages, among which the agency collects, is the 2.9% expected in Amherst Pierpoint Securities for the last quarter of 2022. That would mean losing almost 14% in price in little more than one year, if the estimates are met.
A contrary forecast
Not everyone believes that the US bond will leave losses in the coming months , but most are overwhelming. In Bloomberg they collect the opinion of 58 analysts, and there is only one who believes that the American bond will move towards the level of 1% of profitability. This is Steven Major, Head of Fixed Income Analysis at HSBC.
If it were someone else who was rowing against the current, it is possible that this forecast would be taken less seriously, but Major’s track record in hitting these types of counter-consensus estimates in recent years forces us to take into account his opinion as a possibility that should not be ruled out.
In 2018, Major and his team chained 4 consecutive years being the number 1 in the analysis of sovereign fixed income, according to the survey that Euromoney carries out with the opinion of more than 1,500 investors.
At the beginning of 2019 Major and the HSBC team hit a contrary forecast. Similar to what is happening now, at the time finding an analyst who expected a good year for fixed income was near mission impossible. Major, however, did believe it and warned from the outset that, compared to what the consensus indicated, he did not see signs of inflation. “Everyone talks about inflation, but I look at the data, and I can prove that it is the opposite,” he then explained in an interview with elEconomista.
Now the HSBC fixed income team is succeeding with its estimation again. In April, when the American bond moved around 1.7% and the consensus looked up, Major explained to elEconomista that it was “very difficult” for the bond to reach 2% . “At these levels it is very difficult for sales to continue.
There are many inflation expectations discounted at that price and this level assumes that the Fed has made a mistake and that it will start raising rates next year, and that is assuming too much”, explained. “I think the Fed is right and inflation is temporary, and we are aiming at around 1% for the bond at the end of the year,” he stressed. This is still Major and HSBC’s estimate,
In the next five months we will know if the consensus of analysts was correct, or if, once again, Major is correct with its inflation forecast and its commitment to falling yields on the American bond. Yesterday, during the session, it fell as low as 1.12%.