Column-'Risk-free risk' re-emerges as bonds minesweep 5%-plus - Mike Dolan
LONDON - To say investors were unprepared for 5% U.S. Treasury yields is perhaps the market understatement of the year - but they are now frantically feeling around to see if rates can go higher still and what landmines that might set off.
The speed of the move is breathtaking. With very little change in thinking on Federal Reserve policy rates through next year, 10-year Treasury yields have rocketed some 80bp in little over four weeks. While the Fed has almost deliberately sown uncertainty about future interest rates, the term premium is really supposed to capture fear of things that can go bump in the night longer term. And that's often fiscal policy and debt supply in the absence of a central bank backstop of quantitative easing .
Even getting back to the average of the past 20 years would see it rise further to 50bp - not to mention 2013 highs of 190bp or periods during the Great Financial Crisis about 300bp.When you add that sort of risk premium to standing bond math on future real policy rates and inflation, the argument for long-term investors jumping back in at these elevated rates weakens considerably.
"Add it all up – 3.5% for the nominal policy rate and another 130bp in term premia – and the 10 year at 4.8% does not exactly scream cheap." The SocGen strategists point out Treasury yields were below this nominal growth measure for the past 20 years due a mix of structural disinflation from China's emergence into the world economy and serial bouts of Fed QE. Now they're just becoming better priced.
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