(Bloomberg) -- Steven Major reckons even his mother, a retired medical secretary with little knowledge of finance, would have made a killing on bonds in the first half of the year. But the next six months will be a different story.
In the wake of last quarter’s rally, a host of Wall Street analysts has been slashing their forecasts for the yield on 10-year Treasuries, with some even contemplating a drop below 1%. However HSBC Holdings (LON:HSBA) Plc’s head of fixed income research -- a renowned bull -- is holding his ground, sticking with the bank’s forecast for a yield of 2.1% by year end.
For Major, a lot of bad news is already in the price. Trade tensions between the U.S. and China, signs of economic slowdown as well as geopolitical risks have all forced central banks to become more dovish, sending American bond yields lower by nearly 90 basis points this year.
“I’m not in the business of being deliberately negative,” Major said in a phone interview. “To get darker than this, to predict a Japan scenario, we would need new information.”
That hasn’t held back Major’s peers, who have revised down their estimates for the benchmark U.S. yield by 65 basis points on average since the end of the first quarter, according to data compiled by Bloomberg. HSBC cut its forecast to the current level in March, having started the year predicting 2.5%.
In a sign of the tightly priced market, the yield on the 10-year Treasury was at 2.019% as of 7:46 a.m. New York-time, barely changed on the week even after the U.S. resumed trade talks with China. Traders are still pricing in almost 75 basis points of interest-rate cuts by the Federal Reserve in 2019.
Major has been one of the biggest bond bulls in recent years, known for his view that high debt, slower growth and demographics will keep rates low in the long-term. Yet after government bonds globally returned 5% and credit 7.8% in the first half, he sees limited upside in the months ahead. Rates in many countries are at or near zero, so policy makers have less firepower. Meanwhile the Fed’s median dot plot for the longer-term points to a policy rate of 2.5% -- suggesting limited scope for yields to fall much more, he said.
“Easy money has been made in the first six months of the year due to the capitulation” of the bearish sentiment around bonds, said Major. “My intuition is that it’s going to be much more difficult in the second half.”