Is the long-term bond bull market coming to an end? The 10-year Treasury yield has jumped about 1% in the past six months to 2.75%, leading some market observers like Dennis Gartman of The Gartman Letter to declare its demise. Peter Bookvar, chief market analyst at The Lindsey Group, writes in a recent note that the bond market is "reasserting its power over the long end of the curve," disregarding Fed policy.
But Gary Shilling, president of A. Gary Shilling & Co., a financial research and money portfolio management firm, will have none of that. He's been a bond market bull for over 30 years and tells The Daily Ticker that Treasury yields are heading lower--to under 2% for the 10-year and under 3% for the 30-year.
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"It really depends on your view of inflation and deflation...the greatest determiner of bond yields" says Shilling. "Now we're at 1.2% inflation--the Fed wants 2% or higher. The real risk is deflation."
But does that jibe with some of the favorable data we're seeing on the U.S. economy--2.8% growth in GDP for the third quarter and 204,000 jump in October payrolls, despite the 16-day government shutdown?
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Yes, according to Shilling because most of the GDP growth was due to inventories, "which usually isn't a good sign. It usually means you're stuck with things you can't sell, and most of those [new] jobs are low-income." The U.S. economy has added about one million leisure and hospitality jobs but only half a million manufacturing during this recovery, and manufacturing jobs pay almost three times as much as leisure and hospitality jobs, says Shilling.
"We're limping along about 2% for real GDP...1.5 million fewer people are employed now than at the peak...and the pool of people who could be employed has increased by about 15 million," he notes.
Even when the Fed starts to taper its $85 billion worth of monthly asset purchases, Shilling doesn't expect higher rates.
Tapering will just mean the Fed reduces the amount added to its reserves, still leaving the Fed holding more than $2 trillion worth of banks' excess reserves, says Shilling. What happens to rates will ultimately "depend on what else is happening in the economy," says Shilling.
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