- Despite US 10-year bonds recently climbing above 3%, bond investor PIMCO says a sharp rise in bond yields is unlikely from here.
- Structural forces such as demographics and high debt levels will act to constrain yields.
- Market pricing also suggests that benchmark US interest rates won’t climb as high as previous cycles.
Forget about the oft-discussed 3% mark for US 10-year bond yields – it’s not a big deal according to PIMCO analyst Tony Crescenzi.
The push towards 3% created a talking point in markets last month, culminating in a break higher on April 24.
But the stay above 3% was short-lived — as US 10-years almost immediately dipped lower and haven’t broken above that mark since.
And while 3% is a round number and represented a multi-year high, the figure itself doesn’t mean much.
Instead of focusing on a particular rate, Crescenzi said it’s more useful to assess what broader trends are influencing the outlook for bonds.
Key among those trends is the historical relationship between US 10-year bond yields and GDP growth.
As this chart shows, US 10-year bond yields have historically stayed below nominal GDP growth:
GDP growth in the US beat expectations in the March quarter, with a strong annualised growth rate of 2.3% against forecasts of just 2%.
But according to PIMCO, broader structural forces at play mean the growth prospects for the US economy will remain relatively constrained.
Aside from a short-term boost the wake of the Trump administration’s tax cuts, Crescenzi doesn’t see GDP growth going much higher from here.
Rather, a recession is more likely over the longer-term with the current bull-market now stretching into its 10th year.
“Moreover, with the Fed still holding trillions of dollars in bonds from its quantitative easing program, yield gains in the current cycle will be constrained,” he said.
Crescenzi also looked at current market pricing, which points to the US Fed’s official cash rate rising by another 55 basis points (0.55%) by the end of the year.
That amounts to just over two rate hikes — which will bring benchmark rates to a little over 2% — up from the current range of 1.5% to 1.75%.
And importantly, markets are currently priced for the US Fed to end its hiking cycle with rates still below 3%.
That marks a key difference from the last time US 10-years broke above 3% in 2013, when markets feared the prospect of interest rates rising to almost 5%.
“In general, we think secular forces — from high debt loads to demographics and low productivity gain — will keep interest rates lower than in previous rate-hiking cycles,” Crescenzi said.
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