Amid the growing debate whether rates will keep rising once they hit 3.00%, or they will fall as asset managers find the new level attractive enough to dip their toes and buy duration, one analyst laughs at everyone calling for lower rates from here onward.
In a note published overnight, Deutsche Bank credit strategist Jim Reid writes that “rates and yields will continue to structurally move higher in the quarters and years ahead regardless of any short-term moves, and we hope policymakers won’t be derailed by the inevitable macro issues that this will bring.”
While we will share some more details from this note, the first in a series of why Deutsche believes that global yields have nowhere to go but up, we wanted to highlight one chart which according to Deustche does not make any sense in the context of the ongoing debate of potentially lower yields: the projection of global debt to GDP forecasts for the next 30 years.
According to Reid, “notwithstanding the short-term low supply expectations in Europe, a real head-scratcher going forward is how the market will cope over the years and even decades to come with the central case scenario of higher and higher government debt around the world. Figure 13 looks at the US, Germany and Japan government debt/GDP with forecasts from the US CBO and BIS.”
And here is the chart that is at the crux of Reid’s conundrum: this is the same chart which prompted Fed president Robert Kaplan to suggest that the US debt trajectory is headed toward unsustainability.
This may mean that QE eventually has to become a regular feature of markets for many cycles to come. However, given other forces, it will still likely occur at structurally higher levels of yields but with the main intention of ensuring real yields don’t rise to prohibitive levels as they might in a free market with all the extra supply that is likely.
As a reminder, over the weekend Goldman warned that a 4.5% yield on the 10Y would result in a 25% – or more – crash in stocks. The chart above suggests that the question is not “if” but “when”, and just “how much more…”