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Year Ahead Consensus: 2024 US Treasury Forecasts; Back to front

In December we collated all of the 2024 Year Ahead Outlooks published (primarily sell side research) to get a sense of the consensus view across the asset classes for this year, and have summarised these in this report. On page 6 you will find a summary of predictions forecasts for US Treasuries. These reports were unanimous. US 10-year Treasury yields will fall over the course of 2024, with the only disagreement being the degree of that yield decline. We would also note that given the late Nov/early Dec publishing dates of these Outlooks, and the speed of the yield decline late in 2023, some of these forecasts have already been reached, but some of the most bullish outlooks forecast US 10-year yields to fall as low as 3.0-3.25%. Click here for the report.

Therefore in light of the ferocious rally through December, and the fact that Year Aheads can date very quickly, we provide a collection of recent research notes below that bring the recent moves into context.

Investor positioning:

Bank of America: Investor Bond Positioning; Overstretched?

In their last Global Fund Manager Survey of 2023 (Survey period 8th to 14th Dec 2023) Bank of America shows that investors’ bond allocation was up 1ppt MoM to net 20% overweight. This is the highest allocation to bonds since Mar’09. Investors had been overweight bonds for all but two months of 2023. BofA added that the current allocation is 2.8 stdev above its long-term average. Click here for the full report.

Bearish views:

CrossBorder Capital: The US Treasury Note Is ‘Junk’. The Yield Curve Is Distorted. Yields Must Rise (Jan 2)

CrossBorder Capital reckon the US interest rate term structure has been heavily distorted by Federal Reserve and US Treasury activities, arguing that the 10-year Treasury yield could be 110bp too low. To their minds the ‘True’ yield curve is not signalling a deep recession. In fact, it points to recovery. Click here for the full note.

MI2 Partners: Fading Reflation; Short 10-year Treasuries (Jan 3)

if recent market moves are to be believed, we stand on the cusp of a new reflationary cycle, according to MI2 Partners. They argue that the correlation between stock and bond prices should remain positive if they (MI2) are correct in their view that the economy is back in a structurally inflationary environment, such as the one that persisted before the late 1990s (see first chat in note). The issue that they have with the current set up is that the price action shouldn’t necessarily be confused with a sustainable trend because if assets all go up together, they can just as easily go down. Something has to give, they say.

Indeed, when they look at prices, especially across assets, they don’t scream reflation just yet. MI2 suspect the reflation narrative is more of a function of price action and positive correlation than reality. For markets that have all gone up together, the obvious risk is that we retrace at least some of the moves. Therefore their recommended trade is to short bonds. Click here for the full note.

MRB: 2024: More Pivots Ahead (Dec 22)

Recent (risk on) trends will ultimately help to prolong the global economic expansion, thereby further increasing the odds of an upward tilt to DM inflation starting in the second half of next year, say MRB. Don’t lose sight of the longer-run inflation risks however. MRB reckon DM government bond yields will undergo another wave higher when those aggressive rate-cut expectations are not met. Higher bond yields, in turn, will rekindle de-rating pressures in equities and credit, and trigger another risk-off phase. Click here for the full note.

Bullish views:

Rosenberg Research: History suggests that the bull market in bonds is just starting out (Dec 19)

It’s all about momentum, says Dave Rosenberg in this Dec 19 note. As he quite rightly suggest here, market participants have been underestimating just how far interest rates can go down from here now that the bond bear market has been broken. As the rally was in full swing Rosenberg produced some interesting historical facts that brought the late year 110-basis point plunge in the 10-year yield into context.

He wrote that we have seen ten such declines from a peak over the past forty years. And not once did the fresh bull market stop there. The average additional drop was -200 basis points; the median was -170 basis points; the mode was -150 basis points. So historically speaking, it shouldn’t surprise anyone, other than the bond permabears, that we end up seeing the 10-year T-note yield slice below 2.5% before this thing runs out of gas. Of these other prior episodes, 4 involved recessions, 3 occurred in the context of a financial crisis, and 3 needed none of those, only requiring a big decline in inflation. Click here for the full note. By the way, Rosenberg nailed this recent move in US Treasuries in this piece ”Bonds will have more fun” in late Nov.

Longview Economics:  “The Age of Monetarism – BUY (govvie) Bonds” + Stay Overweight Treasuries (Dec 21)

In their latest Quarterly Asset Allocation note Longview Economics maintain an OW position on US Treasuries, although they have reduced the position size from +9pp. to +3pp, but still remain OW relative to benchmark (see tables 1a & 1b ib the note). Despite the large rally, their view on US Treasuries is largely unchanged. That is, bond yields should (continue to) move lower in 2024, given that shrinking money supply (see figure 4c in report) should increasingly generate deflationary pressures in Western economies. That’s the conclusion of a theme Longview call the ‘Age of Monetarism’ (which is laid out in more detail in a note they published last summer here). Inflation risks are therefore skewed to the downside, i.e. a key reason to stay OW Treasuries. Click here for the full report.

Ned Davis Research: Adding to bond exposure

Ned Davis Research are increasing their bond exposure to 110% of benchmark duration from 105% to get more in line with their models on market weakness. They write in this Jan 3 note that they have been reluctant to chase the market higher under thin holiday trading conditions. Nevertheless, the gap between their position and their models had gotten fairly wide. So they waited for a pullback near support under more normal trading conditions before doing so. Their Combo Model, which combines the Bond Benchmark Model (BBM) and Bond Enhancement Model (BEM), has increased to 123% of benchmark duration. The BBM has climbed to 122%, while the BEM is 129% and remains on its November 17 buy signal (See here.)