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:
Whatever the story, don’t rule out the grey swan of US bonds joining the negative yield club in 2021.
For access to our Slack Chat Room, where we discuss all things markets with our researchers and subscribers