In some ways, it really didn’t matter to Steven Major whether the U.K. voted to stay or to leave.
Sure, as a Brit, Major followed the U.K.’s surprising decision to break with the European Union. And, of course, the 51-year-old Londoner voted (though he politely declined to say whether he was in the “Remain” or “Leave” camp).
But when it comes to his long view on interest rates, bond yields and the economy, Major, who’s proven to be something of a savant as HSBC Holdings Plc’s head of fixed-income research, says Brexit is ultimately little more than a sideshow. Long after the din from the U.K. vote subsides and regardless of what happens in the U.S. presidential election, Major says issues that, at times, have been decades in the making will conspire to depress global growth and keep rates at rock-bottom levels for years to come.
“The real elephant in the room is not the U.K. vote or a Trump presidency,” Major said. “The real elephant in the room is we’ll have low and negative rates for a very long period of time.”
While the Brexit vote roiled financial markets and caused a surge in haven demand, Major says investors in the $100 trillion bond market need to look at deeper structural problems plaguing the world: demographics, the explosion of debt globally and the disparity in wealth between the rich and poor.
Low rates are also a natural consequence of too much government borrowing after the financial crisis. While it gave economies a much-needed boost, the debt burden robbed many countries of their spending power, which could have supported growth over the next decade. This month, the Organisation for Economic Cooperation and Development warned the world economy is slipping into a self-fulfilling “low-growth trap.”
And without a pickup in growth, there’s every reason to believe that investors will continue to seek out the safety of government bonds.
For U.S. Treasuries, the global benchmark for borrowing, Major says yields on 10-year notes will remain pinned close to current levels and end the year at 1.5%. That’s below all other forecasts compiled by Bloomberg last week, which, on average, show that Wall Street sees yields starting to rise.
The 10-year yield tumbled by the most in almost five years on Friday following the Brexit vote and ended the week at 1.56%. It approached the record-low 1.38%, set in 2012. The yield dropped nine basis points to 1.47% as of 10:06 a.m. in New York.
In 2014, when most prognosticators predicted yields would finally rise on the view a stronger U.S. economy would prompt the Federal Reserve to tighten, Major called for Treasuries to remain in demand and 10-year yields to fall to 2.1%. That year, they plunged 0.86 percentage point to 2.17%.
Yet Major bristles at the idea that he’s simply defying the majority.