(Bloomberg) -- The recessionary-risk trigger needed to drive Treasury yields toward zero has gone off sooner than expected and is accelerating the process by which the U.S. may even join countries like Japan and Germany with negative rates, said JPMorgan Chase & Co.’s Jan Loeys.
The catalyst is the extended U.S.-China trade war, which is leading to falling capital expenditures worldwide as corporations reduce or delay spending, he said. The Federal Reserve will likely be powerless to keep the U.S. economy from falling into a recession and the 10-year yield could sink to zero by 2021, he said. That’s a year quicker than he predicted just last month.
“Given what’s happened in Europe and Japan, investors are saying, ‘We’ve seen this movie before and let’s position for it,’” Loeys, a senior adviser of long-term investment strategy, said in a phone interview Wednesday. “The trigger happened sooner and the bond market is moving faster.”
The benchmark 10-year yield has already fallen below 1.6% from around 2.1% a month ago. It was twice as high as it is now in October. Meanwhile, the world’s pile of negative-yielding bonds is up to $15.8 trillion and bond markets on both sides of the Atlantic are sending dire warnings about the global economy.
“We knew there were vulnerabilities out there months ago, but the process is simply moving faster than the modal forecasts of most economists,” Loeys said. “There’s economic weakness due to the capital spending side, end investors are selling equity mutual fund holdings, and the main reason the market is still holding up is that corporates are buying back shares.”
He said he can “easily imagine” a scenario in which U.S. yields even fall below zero faster than people expect, while also “coming out faster,” in under a total of five years.
What gets the U.S. out of a negative-yield sand trap will probably be a “Yankee, can-do attitude” of both parties in Congress when officials recognize that the government can borrow for nothing, said Loeys, who has a Ph.D. in economics. Ultimately, he says Republicans and Democrats should then reach a fiscal agreement that allows the government to cut taxes while boosting spending, pushing the U.S. deficit to possibly as much as $2 trillion to $3 trillion. In about three years, he said, yields would “pop out the other side” because the deficit would overwhelm the supply of savings and force bond yields to rise.
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