TS Lombard sounds the alarm: the bond sell-off wave may be just beginning, with the 10-year US Treasury yield possibly rising to 6%.

Recently, as US Treasury bonds faced significant selling pressure leading to rising yields, TS Lombard's chief US economist Steven Blitz warned that the yield on the 10-year Treasury bond could rise to 6%, and that the long-term bear market for government bonds may just be beginning. In a research report released on Wednesday, Blitz pointed out that US Treasury yields have broken out of a long-term "triangle consolidation pattern," suggesting that yields could rise to around 5.5%. However, he warned that this is "just an initial target, not the end point." Blitz stated, "I have been telling clients for a long time that the world has changed, but the market is always slow to accept this. Even after this round of selling, the market still maintains a bullish mindset - the 'short trap' is real." As of the time of writing, the yield on the 10-year US Treasury bond is around 4.57%, rising by about 30 basis points in just one month. As this warning is issued, the new Federal Reserve Chairman Kevin Wash will officially take over on Friday, facing a highly challenging policy environment. Blitz believes that if Wash maintains interest rates at the June meeting despite rising inflation risks and accelerating bank lending, it is essentially equivalent to loosening monetary policy. Blitz pointed out, "Even if economic growth stubbornly remains stable and far from soaring, if broad inflation risks are on the rise and the Fed does not raise rates in June, it is essentially an easing." The economist listed several factors that could further push up US bond yields: continued strong real economic growth, bank lending growing at twice the core inflation rate, and the US needing to rely on foreign capital to finance the federal fiscal deficit and domestic capital expenditure. Against the backdrop of a zero net national savings rate in the US, achieving balance in funds requires higher inflation or higher real interest rates. For stock investors, Blitz gave a grim judgment, believing that the multi-year bull market has come to an end. He wrote that as bond yields rise, bonds are beginning to offer "compensatory attractiveness" relative to stocks, signaling that the "overvalued stock market will enter a long period of adjustment." Concerns about inflation pressures intensifying have boosted expectations of the Fed tightening monetary policy, leading to a recent rise in US bond yields. Those who believe that the wave of selling in US bonds has not yet ended include Paterick Gavey, Global Rates and Debt Strategy Director at the ING Group. For months, many investors have viewed a 4.5% yield on the benchmark 10-year US Treasury bond as an attractive entry point. However, when the yield surpassed this level, market participants quickly adjusted their expectations and began reevaluating the next entry point. Gavey commented, "The key question now is whether investors will enter at the current level. In my view, this wave of selling is likely to continue spreading." Gavey pointed out that multiple deep-seated factors are still driving the selling behavior, with a high probability that the 10-year US Treasury yield will rise to 4.75%. The sustained rise in benchmark bond yields will impact the US stock market, as the continuing increase in borrowing costs will add pressure on corporate operations and consumer consumption. Inflation remains the core driver of market sentiment. Recent data on consumer prices and industrial production have exceeded market expectations, confirming that price declines are occurring more slowly than previously anticipated. As more inflation data for May and beyond is released, it is generally expected that inflation levels will remain high. Once bond market investors assess that inflation will remain high or even rise again, they will demand higher bond yields to offset the loss of purchasing power. Gavey warned that even a slight increase in inflation expectations to the range of 2.6% to 2.7% would drive bond yields significantly higher, easily pushing yields up by 10 to 30 basis points. Steven Barrow, Head of G10 Strategy at London Standard Bank, also predicted last week that due to continued inflation, the 10-year US Treasury bond yield will reach 5% this year. Barrow commented on the recent volatility in US bond yields, saying, "Most people just assume that what has happened in the past will continue," "The market has been able to hold on to a 4.5% yield and we have not yet really risen to 5%, which does not mean this will not happen in the future." Barrow stated that his bearish conclusion on bonds reflects his longstanding concern about supply-side inflation pressures. He listed a range of factors including global supply chain bottlenecks, ongoing climate change impacts, and tightened immigration policies limiting labor supply, all of which are driving up consumer prices and therefore pushing up US bond yields. However, there are also institutions holding a different view. The global asset management giant Vanguard continues to bet on US bonds, believing that in the $31 trillion US bond market, the 10-year US Treasury bond yield is approaching the upper end of their expected range. Sarah Devaro, Head of Global Fixed Income at Vanguard, stated before the release of the company's latest outlook report, "In the US interest rate market, we maintain a long-term allocation bias. The current 10-year US Treasury bond yield is close to the upper end of our expected range." Vanguard stated, "Persistently high inflation and improved labor market prospects have slightly raised our expectations for the path of monetary policy, increasing the likelihood that the Federal Reserve will maintain interest rates unchanged by the end of the year." The institution added that the prospect of future loose policies is "more limited and more lagging." Regarding the prospect of rising US bond yields suppressing the stock market bull market, Max Kettner, Chief Multi-Asset Strategist at HSBC HOLDINGS, believes that despite the continuous rise in bond yields, the stock market still has room for further growth due to strong corporate earnings recovery and relatively low market positioning. Kettner stated that he currently holds an "extremely bullish" position on stocks. He pointed out that corporate earnings have seen a V-shaped recovery, "further increasing on a high base." He added that the performance of this earnings season is "crazy, absolutely crazy," with about 87% of companies surpassing market expectations, comparable to the period after the economic reopening following the pandemic. At the same time, Kettner believes that stock valuations have not yet reached bubble levels. He noted that overall investor positions are still low, and whether it is systematic funds or active management funds, their fund flows are "far from issuing sell signals." Kettner believes that the current rise in US bond yields does not pose a threat. However, he also acknowledges that if the Federal Reserve raises rates more than once, "the market may find it difficult to accept." He stated that the main interest rate risk comes from the possibility that economic growth may be stronger than expected.