Soc Gen Upgrades U.S. Economy, Treasury Yields Likely to Bottom Out

“Analysts at French bank Societe Generale have a big report out titled The Return Of Yield: Preparing For Rising Long Term Rates.

The theme is very great rotation-y in that they argue that the economy is turning the corner, and interest rates are about to rise.

Their language is strong and dramatic. A watershed moment for the US economy is at hand, and the risk are that it will happen sooner rather than later.

We believe that 2013 will be a breakout year for the US economy. As this realisation sets in and markets begin to price the end of asset purchases and focus on the exit sequence, Treasury yields are likely to bottom out. There is a significant gap between current yield levels and fair values, and we believe that the end of the QE programme will have compressed the 10-year term premiums by perhaps as much as 140bp. The question is how quickly this compression will be unwound. Our central scenario assumes a 2.75% year-end target, but here we evaluate the possibility and implications of a more rapid correction to 3.50%.

It has been our longstanding view that 2013 will see an inflection point on growth. After sequential deleveraging of households, small businesses, state and local governments and now the federal government, the structural headwinds to growth are beginning to fade. (Admittedly, fiscal deleveraging is only beginning, but we believe that the modest drag will be offset by improving private sector fundamentals). Whereas we doubted previous growth spurts in US data, we believe that this time the improvement is Ifor real. We expect this to be a breakout year for the US economy, with growth firmly above trend levels by the end of the year. Ironically, the Fed’s harsh lessons from the previous false starts have led them to adopt a far more accommodative approach with the goal of dampening the bond market’s reaction to any data improvements….”

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