Steven Major, HSBC Holding Plc’s renowned bond bull, said he was wrong-footed by the recent bond selloff because he underestimated how badly investors would react to ballooning US debt and a surge in supply.
(Bloomberg) — Steven Major, HSBC Holding Plc’s renowned bond bull, said he was wrong-footed by the recent bond selloff because he underestimated how badly investors would react to ballooning US debt and a surge in supply.
The rise in bond issuance came at a time when the US economy was still robust and long-dated yields were low relative to shorter maturities, given investors expected a recession. And that’s why investors have been demanding higher compensation to hold them, Major said in a Bloomberg TV interview.
“Where we’ve been wrong is the fact that, normally, I don’t think deficits matter,” Major told Dani Burger and Manus Cranny. “But investors have been asked to take these bonds when there’s a big inversion and there’s loads of them.” The combination of an inverted curve and lack of recession meant that “supply did matter.”
The bank revised its year-end forecast for US 10-year yields by 50 basis points to 3.50% as the bond selloff pushed the rate to a 16-year high. Yet, that’s still well below the current yield level of 4.83%.
Asked if he sees US 10-year yields rising to 5% as offering good value, he said that “you’re talking to someone who’s been very wrong, because I would have thought that was good value at 4%. So 5% should be even better value.”
Major is known for his bullish bond views. Some of his calls stood out, one of which was in 2014 when he correctly predicted that 10-year Treasury yields would drop to about 2.1% while his peers said they would approach 4%.
While Major admitted his recent mistake, he is not a capitulated bond bull. He added that once the economy worsens, the market will have no problem absorbing the increase in bond supply. He reckoned high yields will eventually hurt the economy, predicting that yields will fall to 3% by the end of next year.
“The rise in bond yields we are seeing now makes the bullish views from earlier this year have more chance of being right,” he said. “This comes through a fierce tightening of financial conditions.”
–With assistance from Dani Burger, Manus Cranny and Alice Atkins.
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