The US debt market this year is in the spotlight of investors around the world. A sharp increase in returns has already led to a local collapse in the stock market. What to expect in the future?
In general, forecasts on the US debt market have recently become a kind of competition.
Almost every self-respecting bank or fund considers it necessary to write a review on this topic and voice their assumptions.
First, debt market guru Jeff Gundlach raised his 10-year Treasury yield forecast for the end of the year from 3% to 3.25%. Several other banks followed, and Goldman Sachs was not without it. Goldman experts do not see anything wrong with the growth of rates, but for the time being.
They believe that the recent increase in returns should generally be perceived as a positive signal, since it reflects a positive assessment of economic growth, and secondly, the overall growth momentum from financial conditions remains positive, stock prices have risen, and the dollar has weakened over the past year.
And although the Goldman baseline scenario implies an increase in yields on 10-year US bonds of 3.25% by the end of the year, the bank's stress tests envisage an increase of up to 4.5%. In such an extreme scenario, the US economy will decline and the stock market will collapse by 20-25%.
There is another opinion: in the debt market, the reverse movement may begin, that is, speculators who bet on growth in profitability may begin to close their positions, which will lead to a decrease in profitability and an increase in the value of bonds. From a technical point of view, the yields of 10-year Treasuries have recently broken down a downtrend that dates back to 1987.
Many investors see this as a signal for a further increase in rates. However, do not rush to conclusions. Investors must be aware of the risk of a “fit,” or false breakdown, as was the case in 2006 and 2007. At that time, market participants believed that an economic boom was stable and that higher rates were inevitable, but higher rates put an end to the US housing and credit bubble, which led to a bear market for stocks and the continuation of the bull market in US treasury bonds.
In addition, it is important to note the positioning in the treasury market. The so-called "dumb money" (large and small traders) are actively betting on profitability growth, while "smart money" (commercial hedgers) are rather optimistic about the market and make opposite bets.
The last two times, when these groups positioned themselves in the same way, bonds were restored, and yields eventually declined.
But that is not all. The US Treasury began a large-scale issue of treasuries. Last week alone, it placed bills and notes for $ 229 billion, which was a record. Moreover, this week investors will be offered securities for another $ 258 billion. In general, the auctions were fairly smooth, in any case, the Ministry of Finance was able to place the entire volume, and returns on the secondary market as a result somewhat decreased.
We can see the exact same picture this week. As a result, as we already wrote above, speculators can begin to eliminate "short" positions in treasuries, which will lead to an acceleration of the reverse dynamics.