Increase Exposure to Long-term KTBs
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
Although US TBs should continue trading within the current range in July, yields should rise sharply in 4Q21 on accelerating improvement in August~September employment indicators. However, taking into account: 1) export growth peak out; and 2) downward revision of 2022 GDP growth forecasts, we recommend increasing exposure to long-term KTBs.
10yr US TB yield to exceed March high of 1.77% at yearend
After the enactment of three ‘insurance’ FF rate cuts in 2019, the US TB market contemplated whether a rebound in 4Q19 economic indicators was a dead cat bounce or real recovery. At that time, the monthly average for 10yr US TB yield was fixed at 1.80% for three months. In other words, the 1.80% level priced in both recession fears and recovery expectations. Noting that the US economy is definitely in a recovery phase, we do not expect US TB yields to remain below 1.80%. Yields should exceed the March highs at yearend.
US TB yields to rest in July before re-uptrending in August~September
US TB yield uptrend is likely to restart over August~September, when normalization from Covid-19 should become more pronounced. While nonfarm payrolls registered a shock for April~May, payroll figures should show robust growth ahead of the scheduled Sep 6 end to federal unemployment benefits. Likely to begin over August~September, the next uptick promises to complete the N-shaped trajectory we suggested in our yearly outlook. In July, TB yields are predicted to fluctuate within the current range, affected by payroll-related weakness and uncertainties surrounding federal debt limit talks.
Advise overweighting on long-term KTBs
US economic recovery trickles down to Korea through trade. However, as 2H21 US recovery is likely to concentrate on service consumption, spillover to Korea is to be constrained. According to the KOSIS business cycle clock, exports have already entered a slowdown phase. In addition, the second supplementary budget is raising the possibility of downward revision to 2022 GDP growth forecasts. In such a case, it is likely that long-term KTB yield is already past its high point. We advise overweighting on long-term KTBs.