Why SocGen Thinks There Is Less Than 1% Chance That 10-Year Yields Will Fall Below 1.1%
By Tyler Durden
SocGen has become the latest in a long and illustrious line of (so far wrong) forecasters, to predict that the 30-year-old bond rally, unleashed by Alan Greenspan’s “great moderation” and having gone through QE, thousands of rate cuts, and NIRP, is finally over.
As Bloomberg notes, Societe Generale SA is the most recent firm to go back to the drawing board, and is using a “different” approach in an attempt to come up with the right formula for why bonds are now massively overvalued. “Its bond team recently tweaked a long-standing macro model to incorporate two decades of bond prices from Europe, Japan and the U.K.”
Based on that new model and statistical norms, there’s less than a 1 percent chance U.S. 10-year yields fall below 1.1% especially as the Federal Reserve moves to raise interest rates.
What SocGen is forgetting is that it was precisely the Fed’s rate hike that sent the long end plunging, and yield curve going horizontal, on fears that the US – and global – economy is not ready for tighter US financial conditions. What it is also forgetting is that reliance on any historical models, and thus precedent, is laughable at a time when ever central bank is unleashing never before tried financial experimentation, and helicopter money may be next.
That said, here is why SocGen is convinced that the 10Y will not hit 1.1%: “We had to revert to a model-based approach to figure out how low yields can go after we broke below 1.4%,” a scenario that the firm didn’t think would happen unless the Fed did an about-face, said Subadra Rajappa, SocGen’s head of U.S. rates strategy. In our view, “it still doesn’t make any sense for the Fed to change its policy stance from tightening to even on-hold or easing.”
Cited by Bloomberg, Bruno Braizinha, the architect of SocGen’s models, says the new one implies a “fair value” for 10-year yields of 1.95 percent. That suggests Treasuries are still extremely overvalued after last week’s selloff. Yields were at 1.59 percent today, up from a record low of 1.318 percent on July 6. Alternatively, what the model may be implying is that global growth has been massively overestimated and misrepresented as political powers across the globe fabricate data to restore confidence among the population. But surely such a proposal would be considered nothing more than “conspiracy theory.”
And then there is the model’s own abysmal performance. As Bloomberg puts it very nicely, without hurting SocGen’s feelings, “the fact that SocGen’s original model implied a fair value of 2.85 percent — a level last seen in early 2014 — reflects just how bewildering the bond market has been.” Put in trader terms anyone who shorted the 10Y when it was at 2.85%, has lost about 15%, and that excludes the cost of carry.
It’s not hard to see why bond shops are looking for new methods: after all they have all been dead wrong. But before you mock SocGen, consider that at the start of …read more
Source: Why SocGen Thinks There Is Less Than 1% Chance That 10-Year Yields Will Fall Below 1.1%
