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April 2018

US bond yields: nothing to see here?

Investors shouldn't get too anxious about a recent sell-off in US Treasuries

In investment, nothing focuses the mind more than those instances when a currency, index or security bursts through what’s regarded as a “psychologically important” level.

Investors are currently living through just such a moment.

With the yield on the 10-year US Treasury note having recently broken above the 3 per cent level for the first time in four years, the fear is that this benchmark for global debt markets will simply gallop higher, raising borrowing and debt servicing costs for companies and governments worldwide. That’s a worrying prospect given that the global economy is more indebted than before the financial crisis.

Yet in our view the 3 per cent level is more of a ceiling than a floor. There are a couple of reasons why. 

Global economic factors influence 10-year US yields more than domestic business conditions
US 10-year Treasury yield influenced by global economic factors

Source: Thomson Reuters Datastream, CEIC, Pictet Asset Management; data covering period 31.12.2009-24.04.2018

To begin with, there’s the economic case. The global economy – while in reasonable health – is not expanding as rapidly as in recent months. The picture emerging from our proprietary leading indicators is that world growth peaked at the end of 2017. The same pattern can be seen in the Citigroup World Economic Surprises Index, which shows actual economic data has been trailing consensus forecasts for several months. This is important because US 10-year government bond yields tend to track global rather than domestic economic indicators. As research from our economics team shows, when the world economy cools, US bond yields typically head lower.

Also likely to act as a brake on Treasury yields are technical factors. Surveys show professional investors are maintaining large underweight positions in US Treasuries. Bank Of America-Merrill Lynch’s survey of global fund managers found that a near record 55 per cent were underweight US government bonds. The Commodity Futures Trading Commission’s investor data displays a similar pattern, with the majority of speculative traders holding bearish positions on US government debt. It’s an imbalance that should limit the scope for a further sell-off in US Treasuries.

US benchmark bond yields, then, don’t look like they will run much higher.