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Byron Wien: The Scary Signal of the Bond Market

Byron Wien: The Scary Signal of the Bond Market

By    |   Saturday, 29 April 2017 01:11 PM

Veteran strategist Byron Wien warns that the surprising drop in 10-year Treasury yield speaks volumes about the challenges of a changing economy.

“Whatever the reason, interest rates were expected to head higher, so seeing the 10-year U.S. Treasury yield here at 2.3% is a surprise,” he wrote for Barron’s.

“To many pessimists on the economic outlook, the drop in yields on the 10-year from 2.6% is a sure sign that the economy is weakening. After all, this expansion is almost eight years old and it is reasonable to expect a slowdown or even a recession. The disappointing employment report for March showing only 98,000 jobs were created may have been the first sign of trouble. Others believe the uneven start of the Trump administration in putting its pro-growth agenda to work is a reason to buy bonds and avoid the risks of increased equity exposure,” wrote Wien, vice chairman of Blackstone Advisory Partners, a subsidiary of the Blackstone Group.

“One political factor that may be influencing interest rates is the concern that the new administration under Donald Trump may not get much legislation through Congress. The failure to repeal the Affordable Care Act was the first sign of legislative difficulties. Recent reversals of positions by the president include China as a currency manipulator, Nafta as a bad trade deal, involvement of the U.S. in Syria and Afghanistan, NATO as an obsolete alliance, Russian relations and renewing Janet Yellen’s term as Federal Reserve Chair. These reversals confused voters and investors on where the president really stands and diminished confidence in the positive pro-growth outlook. Some of his conservative supporters feel he is letting them down. This disappointment may be reflected in the lower interest rates and the modest stock market correction we have seen since March,” he wrote.

Taking a hard look at unfunded obligations, increased taxes may well be necessary over the long term, but we will probably not tackle these problems until a crisis is upon us. While this is usually how major challenges are dealt with, that crisis is coming, and one worry I have is that the new administration is already too overwhelmed by the immediate problems to be focusing much on the future. The irony is that interest rates are declining at the federal level when they should be rising in anticipation of future borrowing needs. The market is making new highs but there is plenty to think about. I find myself getting up in the morning before the alarm clock has rung.

Meanwhile, the Trump administration’s tax plan -- and its disregard for the effect it would have on the federal budget deficit -- is certain to pique the interest of a long-dormant segment of bond investors, Bloomberg reported.

So-called bond vigilantes, once feared for enforcing restraint on spendthrift governments, have struggled to flex their muscles in recent years as global central banks stepped in to buy a glut of sovereign debt. Now may be the time for a comeback, with the Federal Reserve talking about trimming its Treasury holdings while the administration’s tax plan could spur more borrowing to cover a shortfall (assuming the projected economic growth doesn’t materialize).

The notion of the bond market holding elected officials to task is of course met with skepticism, given Barack Obama more than doubled the U.S. marketable debt over his two terms as president, to almost $14 trillion. And that burden is poised to nearly double again over the next decade, according to estimates by the Congressional Budget Office that don’t factor in Donald Trump’s fiscal initiatives. His budget director said in a Bloomberg Television interview last week that “deficits are not driving the discussion.”

“While the White House appears likely to rely on optimistic growth assumptions to offset most of the fiscal effects of the proposed tax cut, Congress will not be able to do so,” Goldman Sachs Group Inc. strategists led by Jan Hatzius wrote in a note Thursday. “Indications of openness to a tax cut among congressional Republicans suggest that a tax cut is more likely than revenue-neutral reform. We expect a long road ahead.”

(Newsmax wires services contributed to this report).

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Veteran strategist Byron Wien warns that the surprising drop in 10-year Treasury yield speaks volumes about the challenges of a changing economy.
Byron Wien, Scary, Signal, Bond, Market, Investors
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2017-11-29
Saturday, 29 April 2017 01:11 PM
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