Despite the recent spike in the 10-year Treasury yield to a high of 1.6 percent, U.S. Treasury yields have not been this low since 1966 relative to U.S. economic growth expectations, suggesting there is still room for U.S. bond yields to rise.
As Americans are about to receive the checks offered in Biden‘s $1.9 trillion stimulus package, experts are revising up their forecasts for economic growth and Inflation. According to a Bloomberg survey, the average forecast for nominal gross domestic product in the U.S. has reached its highest level in 32 years – 7.6 percent.
Even though the 10-year Treasury yield has doubled since last November to 1.6 percent, it has struggled to keep pace with economic growth, which may be the largest gap between U.S. bond yields and GDP since Lyndon Johnson became president.
Global bond markets have been hit hard, yet the outlook for economic recovery and inflation is gradually becoming more optimistic, influenced by the stimulus package and the new crown vaccine. Fed officials said rising yields reflect a stronger growth outlook and downplay the need for countermeasures, encouraging traders to push up long-term borrowing costs further.
Julian Brigden, president of hedge fund advisory firm Macro Intelligence 2 Partners, said.
“I am bearish on the bond market and there is too much stimulus in our economic system. It will link economic growth to a spike in inflation.”
While the relationship between bond yields and the economy is not stable, it is rare to see such a large gap. Over the 10-year period ending in 2019, U.S. nominal GDP has averaged less than 2 percentage points higher than the yield on the 10-year U.S. bond.
Brigden said.
“In the past, bond yields were supposed to equal nominal GDP. and now things are very different. But how big is the difference between them? Can you live with a -1% real yield and 10% nominal GDP?”
Jeffrey Gundlach, founder of DoubleLine Capital LP, has previously noted that U.S. Treasury yields should be comparable to the average of U.S. nominal GDP and German Bund yields, which is a measure of the level of yields in international markets. According to this criterion, bond yields would exceed 3% in relative terms if the prevailing forecast turns out to be true.
Gonzalez warns that his indicator serves only as a reference point, not an accurate forecast.
He alludes to the relationship between yields and GDP by taking a dog tied to a stagecoach; a dog cannot really be very far from the stagecoach, i.e., U.S. bond yields cannot deviate too much from the U.S. economy.
The consensus among economists on nominal GDP is based on an average forecast of real GDP of 5.5% and personal consumption expenditures of 2.1%, the Fed’s favored inflation indicator. Goldman Sachs is among the firms that have raised their expectations for both economic growth and yields. Last week, Goldman raised its year-end estimate for the 10-year U.S. Treasury yield to 1.90% from 1.50%.
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