By Bilal Hafeez 07-12-2020
In: hive-exclusives | Global Macro US

2021 Grey Swan #1: US Yields Go Negative!

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It’s remarkable that for all the talk of negative-yielding bonds, no one is entertaining the possibility that US 10y yields could go negative. German, French and Japanese yields are or have been negative over the past year. Even Spanish yields have almost crossed the zero bound. Yet the lowest forecast for US 10y yields in 2021 is 0.65%, while the median forecast is 1.15% (similar to implied forwards, Chart 1). Meanwhile, there are numerous calls for much higher yields, with the highest forecast at 2.2%.

This reluctance to call for negative US yields is all the more surprising given that inflation-adjusted US 10y yields (or TIPs) are currently trading negative (Chart 2). That a key benchmark US bond yield is in negative territory should give us ample warning of what could happen. But more than that, nominal 10y yields have traded as low as 0.4% in 2020 – so surely a 40bps drop from there is not unreasonable. In fact, since 2000, the average major decline in bond yields during a calendar year has been 115bps. And in 2020, it was 140bps. So even if bond yields were to reach the consensus forecast of 1%-1.15% over 2021, an ‘average’ correction lower would take them into negative territory.

Statistics aside, we could easily imagine numerous paths for a major rally in bonds into negative yielding territory. Here are four:

  1. Fiscal stimulus optimism fades. Back in the November 2016 election when Trump won, bond yields surged in anticipation of tax cuts. However, the rough peak was December 2016, then they went sideways in early 2017 before falling for the rest of the year. We could see something similar now with a Biden bounce in yields only for it to fade in 2021
  2. US growth dips in Q1. The US COVID crisis is not over and we could easily sluggish activity until the vaccine is distributed later in 2021. Already both the manufacturing and non-manufacturing ISMs have started to roll over.
  3. Stock correction. Right now we have the twin boosts of a vaccine breakthrough and the new Biden administration, but come January the reality of administering the vaccine and Biden actually governing could take the gloss off markets.
  4. Short squeeze. The strong consensus for higher yields is also reflected in investor surveys which show large underweights in bonds. These short positions could easily get unwound as market technicals get stretched.

Whatever the story, don’t rule out the grey swan of US bonds joining the negative yield club in 2021.







Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)


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