TB Yield Uptrend to Take Place in 4Q21
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
Since the September FOMC, US TB yield movement has been reflecting economy recovery expectations rather than stagflation worries. We continue to expect a US TB yield uptrend in 4Q21. Although KTB markets fear an aggressive BOK hike cycle, we point out that long-term yields should fall eventually on weak economic fundamentals. KTB long-term yields will likely peak out in 4Q21.
Impossible trinity: Long-term TB yield rise, stagflation, hawkish Fed
Long-term TB yield rise, stagflation and a hawkish Fed are conditions that cannot coexist. If concerns over stagflation were truly significant, long-term TB yields should have fallen sharply in line with a more hawkish Fed. However, TB markets paid more attention to economic recovery hopes after the September FOMC. The key topic in the US TB market in 4Q21 is to be economic recovery.
TB yield uptrend to take place in 4Q21, led by real yields
If tapering is implemented by yearend, TIPS will likely be hit the hardest. As liquidity premium proved lower than expected inflation, real yields have remained low since April. The US Treasury announced that the size of TIPS issuance will increase, meaning that when Fed’s tapering begins, TIPS liquidity premium should rise to a more normal level. Therefore, a US TB yield uptrend is set to take place in 4Q21, spearheaded by a climb in real yields.
KTB market to eventually focus on weakened fundamentals
We change the timing of BOK’s next hike from November to October. However, long-term KTB yields will eventually focus on lower economic fundamentals. Based on nominal GDP regression, we estimate 10y KTB yield to peak out around 2.20%, even if the benchmark rate is hiked to 1.50% by end-2022. Forecasting that the benchmark will be 1.25% by end-2022, we continue to advise buying long-term KTBs.