Coming into 2021, economists estimated the 10-year Treasury would yield 1.3% at the end of the year. It leaped through that level straight to 1.6% in one of the sharpest selloffs in 20-30 years, depending on how you measure. That happened by Feb. 26. Yet, somehow, after being so wrong, Wall Street is getting even more myopic in its view on the bond market.
Economists have indeed moved up their year-end expectations — to precisely where the yield is today. Here’s the history of the median estimate from a 60-person study done by Bloomberg, going back to the 10-year low in August. Even by their own stringent standards, this is the first time they’re giving it absolutely no room to run. That is absolutely wild to me.
Whatever logic analysts used to put together their estimates six months ago has already been blown entirely to pieces, yet they seem to keep doubling down on it, calling a top in a chart that, by just about every technical standard, shows no sign of slowing down:
One thing I’ve gotten in the habit of suggesting to viewers lately is to think about the 10-year yield like any other asset. Most people don’t like that because they think the Fed’s control over the market means it won’t follow technical trends like other speculative assets. But clearly they’ve overestimated the Fed’s willingness and/or ability to control the market, as last week’s reaction to Jay Powell proves.
The Fed Chair said absolutely nothing new about his plan. Yet when he said recent volatility didn’t scare him, bonds dropped and so did stocks. Even though this was precisely what I warned about for weeks leading up to it — that no new bond-buying would have the same effects of tapering — there was no reason to think it “should” happen. The Fed explicitly said many times not to expect any such change, but investors had irrational expectations for a twist or a yield-curve control program, because… I don’t know, maybe the market thinks the central bank is in its pocket? Never…
Anyway, the point is that analysts should now be including in their projections the possibility that the Fed is going to allow for some volatility. But with the gap between the current yield and projected at zero, they’re not allotting for upward volatility of any kind. Not from the Fed, $2 trillion in stimulus, a completely vaccinated population by mid-summer, natural recovery in the economy — nothing. Unless one has a strong negative view of what’s to come in the economy this year, calling the top in the 10-year yield just doesn’t make any sense when we just saw it can selloff for no other reason than the Fed reiterating its plan.
If we continue at the pace defined by the lows in the 10-year since August, we get to 1.85% at year-end. If we take a rough line of best fit, we get to about 2.5% by year-end. These seem quite reasonable, assuming we continue on a steady growth path.
I think there is a third scenario that is just as likely: an escalation of the current move higher, due in large part to how stubborn market participants have been in retooling their expectations. The fact economists have left no room for error means every incremental rise in the yield now is going to be even more problematic than the last. If you think I’m overstating the importance of one survey, consider that it is more than 50 economists from the world’s biggest banks, exclusive to paying customers on the Bloomberg Terminal, the most important tool in global finance. One way or another, these estimates are being modeled into everything.
The same group moved their expectations for Q2 Real GDP from 3.2% to 6.5% since the start of the year, and lifted Y/Y CPI expectations from 1.9 to 2.4%. That the same leniency has not been applied to the 10-year forecast implies economists believe an outside force will keep the yield contained. They’re counting on the Fed, when Powell has indicated otherwise. Unless our recovery hits a wall or the Fed follows the ECB in adapting buying programs, our recent trajectory could push 2% in a hurry.
The days of dreaming about negative rates is gone; we may not see another rate-cut for a generation. The long-term picture for bonds is losing support at the same time the short-term threat of inflation and growth is heating up. Throw in a Fed chair who says he’s comfortable with some volatility, and it’s a juicy set-up for bonds to do what every other chart in this market’s been doing for months: go further than anyone thinks possible.
I am the Lead Anchor at TD Ameritrade Network, and the host of Morning Trade Live and Market On Close. I co-anchored Bloomberg BusinessWeek on TV and contributed to