Yields Out of Whack!

Bond yields have been rising for some time despite a rising U.S. total resource unemployment rate, a dramatically lessened CPI inflation rate, and persistent evidence of commodity price weakness.

Bond yields have been rising lately and most seem to think this is appropriate. The pace of economic growth remains stronger than most anticipated and some inflation measures have recently ticked slightly higher. Indeed, at its last meeting, the Federal Reserve announced it would significantly slow the pace of its easing campaign and bond vigilantes have pushed the 10-year Treasury bond yield higher by almost a full percent since September. Many also fear the incoming Trump administration has aggressive ambitions – tax cuts, massive deregulations, and a pro-American economic tilt – that will only overheat the economy further. Finally, domestic yields are being increasingly pressured by out of control burgeoning federal government deficits. Indeed, some strategists are now forecasting the Fed will be forced to suspend its easing campaign and bond investors may push the 10-year yield to 5% or even closer to 6%.

I may simply be wrong, but I perceive bond yields being way too high and “out of whack” with several key historical economic relationships. Consequently, I suspect the pace of economic growth will slow during the first half of this year, and although a recession remains unlikely, should economic growth slow, the 10-year bond yield seems likely to surprise most by declining significantly this year. What follows are just a few key pictorials highlighting the potential for bond yields to perhaps decline substantially rather than continue rising.