Last November 8th, while speaking at a local economic conference, I conveyed my multi-year thesis that the 10-year yield is really just in a channel between 1.60% -3% and that yields should fall in 2019. Back then the 10-year yield was at 3.24%, and at least from my view, the long term downtrend in yields was not broken.
That is more of a technical approach to the bond market. The economics behind falling yields had the perfect backdrop in 2019 to get even as low as 1.60%. So, it wasn’t a shock that for the 5th straight year in my prediction articles I said the 10-year yield will stay in this channel of 1.60% -3% and if world trade got weak, we would see a one handle.
“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%. If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”
Recently the 10-year yield got as low 1.83%, so we got about 23 basis point to get to my low-level range of 1.60%
However, I am getting a lot of questions on if I believe the 10-year yield can break below 1.60% and even under 1%.
The answer is yes, but it’s going to need help.
4 Things you need for a break of under 1.60% and a cycle low in yields.
1. U.S. PMI data needs to break under 50
My 2019 economic forecast was to focus a lot on our domestic PMI data which had room to fall.
“I expect PMI data to fall year over year, which could impact domestic investment slightly, but the economic cycle still has legs to move forward. Keep an eye on the PMI data in 2019. Since America PMI data was good 2018, it has the most room to fall with falling oil prices now. Keep in mind that we already had a manufacturing recession when oil prices crashed a few years ago. We no longer have that massive over-investment in rigs ready to collapse like we saw before. We haven’t even recovered all the extraction jobs at the peak of the shale boom.”
Even though PMI data has fallen, we aren’t really in contracting territory yet, and we have had a few weaker points in this cycle.
From Doug Short:
2. Bad tweets push stocks lower and money into bonds
Only July 25th I tweeted out that if stocks sell-off a 1.60% 10-year yield is ver reasonable. Since the market was recently at all-time highs, we could have some drawdown action leading money into bonds, and that is precisely what has happened since this tweet.
3. We actually get a real trade war
For those who follow me, they know, I am not a big believer in the trade war thesis. I call this more of a trade war tap dance. A real full-on trade war is when you place tariffs and do not remove them to change behavior. The fact that we are always talking about making deals and giving exemptions with government bailouts. This shows me that we don’t really want to get a trade war.
4. Brexit 2.0
Back in 2016, Brexit was the significant factor that drove yields under 1.60% as panic bond-buying happened. We could have this happen again. I will be in London in October, so I will see if I can get any useful information on what is really going on here.
These 4 factors can take us below 1.60% and even below 1% on the 10-year yield as we have over 13 trillion dollars of negative yields again.
I have always put a line in the sand around the 1.60% level. So the majority of the downturn in yields in my view is done. However, twice in this cycle in 2012 and 2016, we have been able to break under 1.60%. Both times were created by an event outside of the U.S., but maybe this time, it might be a domestic reason for yields to fall.
As always, even though I forecasted a yield inversion at the end of 2017 for 2018. And I genuinely believe we inverted the yield curve last year, I am not even close to ushering the R-word.
More on that here
“2017 Yield Inversion Call Looks Great Now”
So all in all, everything still looks beautiful to me. All my 2019 forecasts regarding housing, jobs, and GDP are in line. Even today, no working thesis to say the R-Word.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his own facebook page https://www.facebook.com/Logan.Mohtashami