Bonds Misjudge the Future. We see at least two mistaken beliefs that are influencing bond bulls these days. The first mistake is that the Fed will lift rates only once or twice in 2019. We believe four rate hikes are more likely, with more to follow in 2020. The reason is simple. Nominal GDP is accelerating, and likely to grow at a rate of 5%+ over the next few years.
Category Archives: Weekly Market
Higher Rates On the National Debt Won’t Cause Debt Spiral. Don’t get us wrong. We’re not happy about the federal debt being so high. In fact, we’d prefer it to be much lower. We’re just explaining that the higher interest rates we’re likely to see in the next few years are not going to generate a fiscal crisis.
Why Not 50? Raising rates by 50 bps this early in the cycle isn’t going to make monetary policy tight. Right now, nominal GDP (real GDP growth plus inflation) is up 4.8% in the past year and up at a 4.4% annual rate in the past two years, well above the current federal funds target of 1.625%. The 10-year Treasury yield is about 145 bps above the funds rate. Meanwhile, the banking system is chock full of excess reserves and a record amount of capital. Congress and executive agencies are moving to undo some of the excess regulations on the banking system, there are no major bubbles in the financial system, and corporate balance sheets are in fantastic shape.
The US labor market has rarely been stronger. Recent figures from the Labor Department show US businesses had a total of 6.550 million job openings in March versus 6.585 million people who were unemployed. That’s a gap of only 35,000 workers… the negligible gap between the number of job openings and the number of unemployed who are pursuing work shows that the demand for labor is intense.