An authorized voice is warning people not to get too excited about the bond yield bounce. According to Michael Schumacher, Wells Fargo’s Global Head of Rate Strategy, investors should be wary about the most recent rally in the U.S. Treasury yields.
A pact reached by American and Chinese trade officials in which they agreed to restart negotiations next month resulted in a generalized rally in stocks and bond yields. However, Schumacher explained in the “Futures Now” space of news network CNBC that it shouldn’t be fully trusted.
Schumacher stated that there are several catalysts out there currently, especially trade, the Brexit, and the tensions in Hong Kong. He also said that the news coming out of the trading world and the situation between China and the United States are positive, he remained unconvinced that an immediate solution for the tensions was around the corner.
He wondered whether American president Donald Trump was truly interested in striking a deal and said that was probably not the case. He speculated that this wouldn’t happen until early in 2020 and also observed that the Chinese government isn’t very interested at the moment. He sees that there is good news right now, but there are so many obstacles in the way.
The obstacles, seen as worrisome factors by many within the industry, have resulted in depressed bond yields, especially on the U.S. 10-year Treasury note. It is important to note that bond yields move inversely to bond prices, and that means that the latter has increased while the former have collapsed.
Bonds Are Currently Overvalued
Schumacher said on the space that, fundamentally, bonds are overvalued under the current conditions.
Investors, however, are having a hard time to know where to turn, according to Schumacher, with $17 trillion of sovereign debt and $1 trillion of corporate debt now showing negative yields.
Schumacher wondered what kind of investors would want to get a negative real yield and offered another thought: until Brexit, the Hong Kong protest, and other tumultuous situations calm down, the fundamentals won’t matter much.
Matching the current market’s volatility, Schumacher forecasted that the 10-year would move around for the remainder of the year. He said that short maturity Treasures are the best choice to endure the current conditions for investors.
As of late Thursday night, the bond prices continued their upward movement.