US Treasurys ready to fall back to record lows: debt bull

The interest rate on 10-year U.S. Treasurys isn't heading higher any time soon – in fact it could be ready to sink back to sub-2 percent levels, according to an analyst at Lloyds Commercial Bank.

Tim McCullough, a technical strategist at the bank, has developed a series of charts that represent sentiment in the fixed income sector over a long period of time.

"The charts are telling me that at some point investors will decide that: 'No, yields are heading back lower to 1.80 (percent) or perhaps even lower'," he said, thus wrong-footing many in the industry who believe a spike or slow grind higher for interest rates is the most likely outcome with the U.S. Federal Reserve looking to hike its benchmark rate in the not-too-distant future.

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"Beyond that, we could extend lower in terms of Treasury yields but I wouldn't be that aggressive just yet," he said. The comparison he gave was the shape of a human figure, with the last twelve months seeing a definite "head and shoulders" pattern and the right-hand shoulder now starting to form before the sharp drop of an arm.

McCullough believes the yield will have one last rise towards the recent high of 3 percent but will turn lower towards the 1.80 percent area in the months ahead and well into next year. This will cause substantial headwinds for equity traders, he added, but stock markets could see a brief rally in the medium term until this stretch lower begins.

On Thursday, U.S. 10-year Treasury yields spiked as high as 2.61 percent from July's lows of around 2.46 percent after data showing U.S. labor costs were on the rise. This spurred concerns that the Federal Reserve's first rate hike could be on the cards sooner than currently expected. Treasury yields have retreated a bit to around 2.57 percent in Asia trade.

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Last May, a "taper tantrum" sent U.S. yields higher after the U.S. Federal Reserve first broached its plans to begin reining in its asset purchases. Expectations that it would cause interest rates to rise spurred an outflow of funds. The 10-year yield ultimately peaked at 3.02 percent on December 31.

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Jim McCaughan, the CEO of Principal Global Investors, challenging McCullough's thesis, said that it was a contrarian view that goes against the market and also against what policymakers at the U.S. Federal Reserve have effectively touted. He added that a fall back in yields to those levels would need a "recessionary scenario."