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February
02
2018

SocGen's Edwards: Get Ready for Negative 10-Year Interest Rates
Tom Eckett

Société Générale's bearish strategist Albert Edwards has told Investment Week he believes US 10-year Treasury yields will fall to as low as -1%, as he warned of "double bubble trouble" in US markets. 

Edwards previously forecast that US 10-year yields will fall below zero but told Investment Week these could go as low as -1% in "the depth of the next recession" as they converge "totally" with Japan and Germany.

"Sound ridiculous? German 10-year yields were -0.2% last July," he added.

On Monday, rising inflation expectations caused a sell-off in the global bonds markets with spreads in US 10-years widening to 2.73%, the highest point since April 2014.

Although Edwards predicted yields to widen beyond 3% first, he said they would drop into into negative territory as the US and Europe would "flip" over into outright deflation and central banks would adopt even more extreme measures such as negative interest rates and "helicopter" money.

SocGen's Edwards: We are now just one recession away from Japanese-style outright deflation

Edwards said: "We had negative 10 years in most 10-year government bond markets in Europe some 18 months ago and in Japan. The US was the outlier then.

"In the next global downturn, US 10-year yields will converge totally with Japan and Germany. It will be another deep downturn because of the credit and asset bubbles that global quantitative-easing (QE) has pumped up."

Furthermore, the bearish analyst said he expected the market crash to come a lot quicker than investors were expecting as the US now had "double bubble trouble" with bubbles in both corporate and housing debt.

He said the Federal Reserve's "easy-money" policies, which has driven household wealth to fresh highs, coupled with the savings ratio falling during the same period, had fuelled an "unsustainable credit bubble".

"Just like 2007, this is another economic boom fuelled by an unsustainable credit bubble that will inevitably blow up with a rooky Fed Chairman [Jerome Powell] in place."

In SocGen's annual Global Strategy Presentation, the permabear said it was Bank of Japan action, quantitative tightening (QT) or the fear of recession itself as the three factors which could trigger the next crash.

Imagine this tempting scenario: You invest $1,000 of your hard-earned US dollars in the mighty 10-year US Treasury. In one year, your patience and investment savvy has paid off handsomely. You get back principal plus your return on interest: $990.

Investing money to lose money? It sounds laughable. Insane. But most European government 10-years have experienced negative 10-year rates within the last two years. Germany had them last July.

When extreme Fed measures (e.g.. the “emergency conditions” of a near-decade of near-0% interest rates) cease to work, you know what the Fed is going to. Resort to even more extreme measures, like helicopter money and negative interest rates.

In the next global downturn, US 10-year yields will converge totally with Japan and Germany. It will be another deep downturn because of the credit and asset bubbles that global quantitative-easing (QE) has pumped up.

 

 

Asset Management Correspondent, Investment Week 

Tom joined Investment Week in August 2016 as an asset management correspondent covering the ETF beat.

Outside of the office he is a keen cricket, football and boxing fan and runs his own sports website. 

 

www.investmentweek.co.uk