A bird environment for government bonds is reflecting a highly uncertain future for the United States economy, pointing to both of them more slow growth and stubborn inflation.
After a blowout higher this first year which scared the markets, Treasury yields fell back abruptly as investors shifted their focus away from worries on the price increases to the potential that the rapid outbreak in post-pandemic activity could start to slow down.
In the 70s, the mix of higher prices and lower growth was called “stagflation,” a pejorative that has garnered little attention since inflation has remained subdued over the past few decades.
However, the word is coming up more is more in these days like growth the image becomes more cloudy.
“The market is trading on the subject of stagflation, ”said Aneta Markowska, a chief financial economist at Jefferies. “There is the idea that these price the increases stand for cause demand destruction, cause a policy mistake and in the end that slows growth. ”
For its part, Markowska thinks that trade that sent 10-year Treasury yields plummet from a peak of about 1.75% in late March at around 1.18% earlier this week was a was mistake. Yields trade in front of the price, so a slump means investors are buying up bonds and pushing prices higher.
He sees a strong consumer and an impending eruption in power supply, reversing the current bottleneck that pushed prices to their highest levels from before the 2008 financial crisis, how to generate an abundance of momentum to maintain growth cooking without generating runaway inflation. Markowska sees the Federal Reserve staying on the sidelines at least until 2023, despite the recent market prices that the central bank wants to begin raising rates in late 2022.
“The consensus foresees a projection of 3% growth. I think we could grow from 4% to 5% next year” Markowska said.” Not only is the consumer still very healthy, but at some point you will have a huge supply of stocks. Though demand arrives down, the offer has so much catching up to do. You will see the mother of all refueling cycles. ”
The Bond market, which is generally seen as the more sober component of financial markets as opposed to the go-go stock market, he doesn’t seem so convinced.
Bass-growth world Arriving back
the 10-year Treasury is seen as the fixed income indicator and generally, a barometer for where is the economy it is direct as well as interest rates. Also with The gathering on Wednesday in yields, a 1.29% Treasury does not express much not of confidence in the future growth trajectory.
“Our view is growth and moderate inflation, “said Michael Collins, senior wallet manager to PGIM Fixed Income. “I don’t care what growth and inflation appears like This year, what matters for our forecast of the 10-year The Treasury is what it will be like over 10 years. And I think it will go back down. That’s the world we live in. ”
The reference is to a below-trend growth environment with interest rates good interest below standard.
As the economy he has grown out of the government- An enforced halt to the pandemic, GDP was well above the trend of around 2% that had prevailed since the end of the Great Recession in 2009. The Covid recession was the shortest on record, and the economy is a rocket since mid-2020.
But Collins expects the modest-growth world to return, and for investors to keep the returns well within a content range.
“The United States will continue to be a leader in global growth and economic dynamism, “he said.” But 1.5% to 2% is ours speed limit on growth unless we have some productivity miracle. ”
Measuring the impact of inflation
The looming question, therefore, is inflation.
Consumer prices rose by 5.4% in June while producers receive a 7.3% price increase. Both numbers indicate continuous price pressures that Federal Reserve Chairman Jerome Powell also acknowledged were more aggressive and persistent of him and his central bank colleagues he had foreseen.
While the slide in returns indicates that at least some of the concern has arrived out of the market any further signs that inflation will last longer than politicians predict could change investors’ minds in a hurry.
And why of the swirling dynamics that threaten to lift that specter of stagflation. The biggest growth concern at this moment centers on the threat represented by Covid-19 and its delta variant. Slowing down growth in rising inflation could be lethal for the current investment landscape.
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“If the virus begins spread rapidly again, which would reduce economic growth and prolong the inflationary disruptions in the supply chain that have affected so many sectors, including semiconductors and housing, “said Nancy Davis, founder of Quadratic capital and portfolio management manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund.
“The stagflation is even bigger risk for investors with respect to inflation, “Davis added.
Collins, however, said he sees the current 10-year rendered as trading around fair value considering the circumstances.
The treasure market is often far away more deliberate compared to its equity-focused counterpart, which can swing wildly on titles both good is bad. at his current level, the bond market is paying attention view on what’s next.
With the football market’s sensitivity lately to what’s going on in bonds, this could mean some volatility on the equity side.
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“Given what happened over the last 18 months and the problems much of the world faces over the next 2-3 years, 1.2% 10-year it’s understandable, ”wrote Nick Colas, co-founder of DataTrek search. “It doesn’t mean that stocks are bound to have a hard residue of 2021, or that a crash is imminent. It means that Treasuries have a healthy respect for history, in particularly the last ten years worth of US inflation below the media”.
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