HSBC's Major, Who Called 2014 Bond Rally, Cuts Yield Forecasts

  • Bonds to be supported by Fed, `ECB stuck in dovish mode'
  • Sees Treasury 10-year yield at 1.5% end 2016, from 2.4% before

Steven Major is counting on the Federal Reserve to help him repeat history.

The London-based head of fixed-income research at HSBC Holdings Plc, who stood out in 2014 by correctly predicting that 10-year Treasury yields would fall, cut his end-of-2016 yield forecast to just 1.5 percent, from 2.8 percent previously. That once again puts him at odds with the consensus, with the median of 60 economist predictions compiled by Bloomberg giving a reading of 3 percent.

Just as he was last year, Major is dismissive of concerns that higher interest rates pose a danger to the bond market, arguing that the Fed won’t be as aggressive as some investors and analysts expect. That will send the 10-year yield sliding to the lowest since 2012, when the central bank was still buying bonds as part of its quantitative-easing program. Treasuries will also be supported by accommodative policy from the European Central Bank and the slowdown in emerging markets, according to Major.

“We are less convinced that the Fed will deliver the tightening anticipated,” he wrote in an e-mailed report dated Thursday. “Our lower yield views are part of an international story, one that sees the ECB stuck in dovish mode well beyond the end-2016 forecast horizon and headwinds from some emerging markets.”

Treasury yields erased losses Thursday after minutes from the Fed’s Sept. 16-17 meeting showed that policy makers were concerned about risks the slowing global economy posed to U.S. economic expansion. Some officials said they wanted to hold back on raising interest rates because inflation remaining entrenched below their 2 percent target might raise questions about the central bank’s credibility.

The U.S. 10-year yield was little changed at 2.08 percent at 2:32 p.m. New York time. The benchmark 2 percent security due in August 2025 trraded at 99 10/32.

HSBC sees the 10-year Treasury yield ending the year at 2.1 percent, down from a previous prediction of 2.4 percent. That’s also lower than the 2.45 percent median of analysts’ forecasts.

While there is still a risk that the Fed lifts rates in December, the trajectory of moves after that will be slow, Major said. The odds of a rate increase by policy makers’ Dec. 16 meeting are 37 percent, futures contracts indicate. The calculations are based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.

Investors are looking to minutes of the Federal Open Market Committee’s September meeting published today for signs of how close officials came to lift off last month. Later the U.S. will auction $13 billion of 30-year securities. They yielded 2.87 percent in pre-auction trading, compared with 2.98 percent at a previous sale of 30-year bonds on Sept. 10.

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