- 2020 outlook for the US 10-year Treasury bond
2020 outlook for the US 10-year Treasury bond
Wednesday 18 December 2019
In 2019, the 10-year Treasury yield traded in a range of 1.46-2.78%, the fourth widest range since 2010. The 10-year yield rallied due to uncertainty over US-China trade negotiations and ongoing concerns about a weakening global economy. Fueling the rally further was a dramatic pivot in the Federal Reserve’s monetary stance from hawkish to dovish, which led to three rate cuts, and finally to neutral. This backdrop was a catalyst behind a strong 10% increase in the US 10-year yield in 2019. Historically, Treasury performance often suffers following a 10% return the preceding year, as the chart shows.
UK election could pave the way for an orderly Brexit and a rebound in equities
Based on the potential for a Conservative government, we believe that the probability that a Brexit deal is ratified is now about 80%. As alternative scenarios, there is also the lower potential that the UK remains in the EU (15%) or of a Hard Brexit (5%). Under the main scenario, the 10Y Gilt yield could move up from the current levels, remaining below 1% at the end of 2020. We still see room for the GBP to rebound in the short term, although the outlook for the medium term is less compelling. On the equity side, a stable government could drive a re-rating of the UK market, which is currently trading at discount to the EU and global markets. We remain positive on the more UK-focused domestic names: house builders, consumer discretionary stocks and financial companies.
Screen the Euro fixed income market in the era of three ‘lows’
As 2020 approaches, the uncertainty in the market has receded but there are still risks ahead involving macroeconomic, political and technical factors. Under such a scenario and with central banks being accommodative, we do not envisage a major increase in European core bond yields from their current levels given the limited growth potential and the scarcity of tools left in the ECB’s toolkit to stimulate the economy. Should the economic situation deteriorate, there could be room for yields to fall, but probably not to the lows reached in late August/early September.
Renewed expansion of Fed balance sheet will not be QE but will affect markets
On 30 October the Federal Reserve cut the federal funds rate for the third time this year, while hinting at a pause over the next few months. The rate cut followed the Fed’s announcement on 11 October that it will address a liquidity shortage causing volatility in the overnight loan market by buying $60 billion per month in Treasury bills until Q2 2020 and support overnight repo operations through January 2020.