Societe Generale SA.

Recently, its bond team tweaked a hoary macro model to integrate two decades of bond prices from Japan. The recent U.S. bond market tries to call a bottom in yields which has proven to be an absolute minefield. Wall Street prognosticators have had to go back to the drawing-board frequently as the voracious demand for Treasuries turned over their understanding of just how low yields can go.

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Now, the latest one to try a different approach in an attempt to come up with the right formula is Societe Generale SA. Recently, its bond team tweaked a hoary macro model to integrate two decades of bond prices from Japan, U.K. and the Europe, Japan. With the help of a new model and statistical norms, analysts concluded that there’s less than 1% chance U.S. 10-year yields fall below 1.1%, particularly as the Fed Reserve plans to raise interest rates.

The Day They Killed the Dollar | Alternative Economics - alternativeeconomics.co
The Day They Killed the Dollar | Alternative Economics - alternativeeconomics.co

Subadra Rajappa.

Subadra Rajappa, SocGen’s head of U.S. rate strategy said, “After we broke below 1.4%, we had to relapse to a model-based approach in order to find out how low yields can go,” a state of affairs that the firm didn’t think would happen unless the Fed took a U-turn. In our point of view, “it doesn’t make sense for the Fed to alter its policy standpoint from tapering to even on-hold or easing.”

The designer of SocGen’s models, Bruno Braizinha says the recent model implies a ‘fair value’ for 10-year yields of 1.95%.

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It proposes treasuries are still awfully overrated after last week’s sell-off. Today, yields were at 1.59%, which is somewhat higher than a record low of 1.318% on July 6.

As per the facts and figures, the original SocGen’s model implied a fair value of 2.85% (a level last seen in early 2014)and reflects just how perplexing the bond market has been. If you take a look at the JPMorgan Chase & Co.’s fixed-income team; they had also adjusted their model recently to better account for monetary policy expectations outside the United States.

Bloomberg survey.

Bloomberg surveyed strategists revealed that yields on 10-year treasuries would end the year at 2.75%. As a matter of fact, it’s not difficult to see why bond shops are in search of new way outs.  It’s way off the mark and that’s proved now. Moreover, the median forecast recorded today is more than a percentage point lower.

No matter what the reasons either the U.K.’s dramatic vote to leave the European Union and the tepid worldwide growth to negative interest rates, the gains in Treasuries and other haven assets have bewildered even the bond market’s brightest luminaries.

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