Looking at the past data of UST10 yields the last time yields was above 4% was in December 2007 at 4.10%. The yield was trending down from above 5% in 2007 — the eve of 2008 Global Financial Crisis.

And it was in September 2008 the Lehman’s moment emerged that saw the UST10 yields collapse to 2.42% end of 2008 from above 4%. It was one of the most significant falls in market rates on record.

Fast forward to 2022, the UST10 yields is on the uptrend. While the focus has been on the Fed Funds Target range following the recent FOMC meeting, there are also another component to this query which is the UST10 yields.

The Fed certainly made headlines during the just completed September FOMC meeting. The policy makers are expected to maintain their aggressive policy rate hikes to cool inflation despite the economy envisaged to slow down sharply with the risk of falling into recession.

Now, looking at the UST10 yields, there are several factors that come in to play when trying to determine the direction of the UST10 yields — US economy, inflation, flight-to-quality and supply considerations, technical analysis and quantitative tightening (QT).

But there is an important component we need to focus on that is the real yields. In this case, the focus is on the UST10 real yields. It has been in negative territory for the better part of 2021 and early 2022.

The real yields have now moved back decisively into the plus column. And the move into positive territory has been swift, and rather noteworthy. For instance, March 8 of this year, the 10-year TIP yield was as low as -1.07%, but of recent it has risen to 1.66% on an intra-day basis, an incredible turnaround in a relatively short period.

By hitting this new interim peak, the 10-year real yield blew though the 2011 high watermark of 1.38%. And another Treasury security has been following.

And we believe the next peak for the 10-year real yields is 1.68%, a reading that was registered in 2010. At this level,the UST10 yield came in around 4%. What we see in the higher real rates is the clear expectation that the Fed is going to drain a tremendous amount of cash and liquidity out of the market,

Our assessment shows the UST10 yields will pass our initial 4% projection. This means that UST10 yields is yet to reach its tipping point. It is still in an environment where the policy rates are still on a rising trajectory. It now looks like it will settle at 4.25% with an upside of 4.50% by end 2022.

MGS10 Yields Still Has Some Upside.

Since inflation has risen materially and is likely to stay above the target for some time, central banks around the world have been pressured to act. The pace of rate hikes in major economies could ratchet tightening pressure on central banks in the emerging markets (EM).

EM central banks are generally expected to follow suit to prevent significant capital outflows and preserve currency stability. We are of the view that it is highly probable that the ongoing consecutive interest rate hike by Bank Negara Malaysia (BNM) will continue to 2.75% by the end of this year.

While there could be renewed turbulence, we believe that the rise in local government bond yields would not be too significant given the critical support from local institutional investors.

For the remaining of 2022, we anticipate that foreign flows into the local bond market will remain pressured amid market expectations of interest rate hikes by the US Federal Reserve (the Fed) and a narrowing yield premium between US Treasury (UST) and MGS.

We expect the MGS10 yield to rise to around 4.55% by the end of this year with an upside of 4.60%.

Source: AmInvest Research - 29 Sept 2022