According to the data of Ned Davis Research, an American investment research institution, the collapse of the bond market in the past few weeks may not have ended, and the yield of 10-year US treasury bond bonds may still exceed 7%.
Last month, the yield of the US 10-year treasury bond bond exceeded 5% for the first time in 16 years. Investors were worried about the tightening policy of the Federal Reserve and the huge debt of the US government.
Ned Davis Research's basic forecast is that the yield will remain near this level. However, Joseph Kalish, a strategist at the company, said that if the US economy can avoid a recession and the Federal Reserve continues to raise interest rates, their view that they may break through 7% would be "very strong".
In a research report on Tuesday, he wrote, "I cannot rule out the possibility of yields falling to 3% or lower in the event of economic recession or anti inflation, where the nominal growth rate will be significantly lower than interest rates
However, the greater long-term risk is if the yield moves in the opposite direction - towards 7%. Few people consider this possibility, but from a historical perspective, it is very reasonable, "he added.
Bond yields, which are opposite to price trends, surged in October due to signals from the Federal Reserve that they plan to maintain high borrowing costs for a longer period of time until 2024 to curb inflation, which is still well above the 2% target.
CME's Federal Reserve observation tool shows that only 21% of investors believe that the Federal Reserve will tighten policy in December. Kalish believes that the probability of raising interest rates is "25% higher than market expectations, but not more than 50%". Bond yields often rise in sync with interest rates, as the fixed income of bonds becomes less attractive to investors.
Kalish supported his claim that the yield could exceed 7% by adding together the current 3.4% Personal Consumer Expenditure Index (PCE) inflation rate, 2.25% Real Neutral Interest Rate (r *), and 1.65% long-term bond maturity premium.
"Add all this up and you will get 7.2%," he wrote. - "Therefore, it is actually quite conservative to accept a 5% 10-year treasury bond bond yield."