As you know, the ongoing debate about where 10Y yields are heading and about what the bond selloff presages for equities is, well, it’s ongoing.
And when I say “ongoing” I mean it’s devolved into a veritable obsession. Over the weekend, Goldman “stress tested” the economy for the impact of a rate shock that would theoretically drive 10Y yields to 4.5% by the end of the year. That note came a week (give or take) after they upped their year-end forecast for 10Y yields to 3.25%. Other banks have followed suit.
Part of Goldman’s stress test involved projecting a 20-25% decline in U.S. equities, a precipitous dive that would feed through to the real economy by way of tighter financial conditions.
One thing to note about this whole debate is that last year, consensus was also overwhelmingly bearish USTs and we all know how that turned out. So it’s at least worth considering whether everyone might be wrong.
When you think about that possibility, it’s tempting to say something along the lines of this: “well, if you look at supply forecasts tied to financing Trump’s fiscal stimulus and tax cuts, and if you look at the possibility of foreign demand waning just as the Fed lets the balance sheet rundown and if you consider Fed hikes and inflation picking up and a rebuilding of the term premium and … etc. etc.”
While that’s all fine and good, remember that there were plenty of seemingly good reasons to be bearish on bonds headed into 2017 too. Maybe the list wasn’t as long and maybe the reasons weren’t as compelling, but there was a rationale.
Anyway, Morgan Stanley is out with a highly amusing contrarian take.