Treasury Yields Going To 1% Or Lower

Recession fears may be overblown, but they are impacting the market nonetheless, Guggenheim’s Minerd says.

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Reviewed by: Cinthia Murphy
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Edited by: Cinthia Murphy

Yields on 10-year Treasurys could dip to 1%—or lower—before the year is over. That’s the latest forecast from Guggenheim’s Chief Investment Officer Scott Minerd, who argued this week that risks to the global economy abound, and the markets seem to be in a “funk.”

Minerd’s latest commentary pointed out that there seems to be a growing conviction in markets that we are headed into a recession—if we are not already in one. Data points like the index of leading economic indicators (LEI), which went negative for two months in a row, have added fuel to that notion. As he put it, “Recessions typically do not occur in the U.S. without the LEI declining for three consecutive months, and now we have two in a row.”

But to Minerd, the current environment needs to be taken in perspective. Yes, additional weakness in equity markets lies ahead, but that doesn’t mean recession is imminent. Nor does it mean there aren’t opportunities for investors.

Minerd’s Key Takeaways

  • U.S. equity markets have not bottomed yet, but value hunters rejoice.

The S&P 500 could still drop toward 1,600 and the Nasdaq to 3,800 before we hit bottom, Minerd says. But these could be good times to buy in to the market if you are a value hunter.

“For those of us who remember, after the market crash of October 1987, the next U.S. recession was still two years away, creating a great buying opportunity,” Minerd said. “I could say the same for the periods following similar market declines in 1994 and 1998.”

“Markets are in a funk over the risks to the global economy—and there are many—but I believe future market historians will refer to the current period as ‘The Great Recession Scare of 2016,’” he said.

  • Treasury yields to drop below 1%

“Central banks around the world, reacting to the same recessionary fears, are likely to cause long rates to sink materially lower than where we are today,” Minerd said. “I see the 10-year Treasury note falling to 1%, perhaps even lower, before year-end.”

Monday, 10-year Treasury yields were around 1.77%. But rates have already gone negative in Japan and in Europe, and that downward pressure should continue to weigh on U.S. Treasurys.

“As low as rates are today, I expect further declines in short-term and long-term rates, both in Europe and Japan, and that ultimately the Bank of Japan and the European Central Bank will take their respective overnight rates to as low as -100 basis points,” he added. “Such an event would likely cause Germany’s 10-year bund to trade at around -50 basis points.”

A look at the Treasury ETFs shows that these funds have been benefiting from growing investor demand for the safety and relatively attractive income potential of U.S. debt. Bond yields fall as prices rise.

Since the beginning of the year, investors have poured more than $18 billion into U.S. fixed-income ETFs. The iShares Barclays 20+ Year Treasury Bond Fund (TLT | A-83) has gathered $2.6 billion; and the short-dated iShares Short Treasury Bond (SHV | A-97) has gathered $2.75 billion in the same period, while the iShares 7-10 Year Treasury Bond (IEF | A-55) has raked in $1.85 billion. These ETFs are merely a sampling of an asset class that’s hugely popular this year.

Chart courtesy StockCharts.com

  • The U.S. economy may not be in as bad shape as some suggest

“The decline of the leading economic indicators for three consecutive months has generally been a condition for a recession, but not necessarily a confirmation of one,” Minerd said.

Instead, U.S. GDP growth could surprise to the upside; jobs data point to a growing economy; and U.S. consumers continue to show strength, he says.

“Based on our purely dispassionate analysis of economic fundamentals, the reality is we are not currently in a recession, nor are we likely to face one this year,” he noted. “The U.S. economy has plenty of steam and should continue its expansion for another two, maybe even three, years.”

  • Buy risk assets

If volatile markets promise a bumpy ride, they also offer value, Minerd says.

“I have great confidence that continued deterioration of market conditions over the next three to six months will prove an excellent opportunity to allocate to risk positions too heavily discounted by unwarranted, looming fears of recession or financial crisis,” he said.

But so far, ETF investors have yet to buy into that notion. In January, U.S. equity ETFs faced more than $11 billion in net redemptions. Since then, another $1.3 billion or so have fled the asset class. International equity funds have been victims of a similar distaste for risk. Year-to-date, nearly $10 billion have flowed out of these strategies.


Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.