Contrarian 5% Bet on 10-Year Treasuries Gains Credibility

US Treasury Yields May Surpass 5% Amid Inflation Concerns

US Treasury traders are debating whether the 30-year yield will mount a sustained push past 5%, but one market veteran is taking a far bolder wager. Steven Barrow, the head of G10 strategy at Standard Bank in London, predicts that the 10-year yield will hit 5% this year due to persistent inflation.

This level has not been surpassed since 2007, and it's more than 80 basis points above the average year-end estimate of strategists surveyed by Bloomberg. The disruption to global energy markets caused by the war in the Middle East has reignited inflation concerns, making Barrow's 5% yield prediction more plausible. Despite being far from consensus, Barrow's view has not been dictated by the war, but rather enhanced by it.

The 10-year rate traded around 4.46% on Tuesday, compared to 3.94% before the US and Israel's attacks on Iran in late February. The surge in energy prices due to the conflict in the Middle East has battered US Treasuries and other bond markets, driving up market gauges of inflation risk. A break above 5% would fuel debt sustainability concerns, pressure global corporate borrowing costs, and risk spurring a rotation away from stocks.

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Barrow's bearish bond call reflects a years-long focus on supply-side inflationary pressures, including global supply-chain squeezes, the ongoing impact of climate change, and tighter immigration policy limiting labor supply. His contrarian status might reflect the fact he works alone, rather than as part of a large division of strategists. Barrow's experience as a strategist spans four decades, during which he has made successful forecasts on the US dollar and British pound, though has been caught out by the Japanese yen's persistent weakness.

One argument floated by bond bulls and some policymakers is that artificial intelligence will transform the US economy, boosting productivity and justifying easier monetary policy. However, Barrow is skeptical, having lived through a number of technological developments that have not had a significant impact on the economy.

Barrow's bearish call on Treasuries in 2021 proved prescient as a resurgent economy drove yields higher. His current prediction may seem bold, but it's not without precedent. With the market's recent range of Treasury rates, most people are assuming what has happened will continue to happen. However, Barrow believes that the market's ability to hold onto the 4.5% yield does not mean that it cannot surpass 5% in the future.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline