Still Lower Rates?

The Great Bond Puzzle

 

There are good reasons why 10-year US Treasury yields could plunge to match the prevailing zero yields on equivalent German Bunds and Japanese JGBs. Taking into account the effects of the recent QT policies, ‘true’ Fed Funds could be nearer to 5-6% than the targeted 2½%. Although US policy-makers may feel reluctant to cut policy-rates much from here, the structural shortage of ‘safe’ assets and the systemic needs of global money markets for liquidity will likely see QE restarted over coming months. We foresee a ‘half-way’ house, whereby the US FOMC allows modest rate cuts while pumping in more cash. The US yield curve will steepen, but with long-dated yields testing 2%.