Financial experts are sounding the alarm for the bond market, suggesting that interest rates are poised to scale even loftier peaks than today’s already elevated levels, all thanks to the economy’s remarkable resilience.
Jim Bianco, president and macro strategist at Bianco Research, and Mohamed El-Erian, president of Queens’ College, Cambridge discussed on Bloomberg News the potential inflationary storm brewing and the implications for the Federal Reserve’s policy.
The pair honed in on the staggering surge in oil prices over the past few months, with the WTI-graded (West Texas Intermediate) rallying by an astonishing 30% since late June.
Both Jim Bianco and Mohamed El-Erian converged on a pivotal issue: the risk of inflation resurfacing.
“Wait until we see gas prices in a few weeks,” Bianco wrote on X.
El-Erian drew a haunting parallel with the tumultuous 1970s when not one but two oil shocks sent inflation soaring.
Bonds Enter Multi-Year Bear Market
Bianco predicts that the Fed will stay its hand at the upcoming FOMC meeting on Wednesday, Sept. 20.
However, he boldly forecasts a rate hike in November, “I’m more hawkish than the consensus,” he said. “I’m sitting in the higher-for-longer camp right now.”
The bond market has entered a multi-year bear market, Bianco says. Interest rates are not expected to revert to their pre-pandemic levels anytime soon, if ever.
The iShares 20+ Year Treasury Bond ETF TLT has now fallen 47% since its July 2020 highs.
Bianco also believes an additional rate hike will take place at the outset of 2024. He also dismisses any notions of rate cuts for the same year. The possibility of rate reductions, he insists, could only be rekindled by a “full-blown hard landing recession” in 2024.
At the heart of Bianco’s thesis lies a stark contrast between the American and Chinese economic landscapes. While the U.S. enjoys an extended period of extraordinary post-pandemic growth, China, according to the macro analyst, finds itself in a different phase of the economic cycle.
El-Erian delivered a final warning on the 10-year Treasury yield: if the crucial 4.35% resistance is breached, it could unleash a cascade effect, sending it soaring to a potentially nerve-racking 4.75%.
Chart: US 10-Year Yields
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