Michael Schumacher of Wells Fargo Securities said that inflation caused by the supply chain crisis will push up bond yields in the coming weeks.
The company’s head of macro strategy believes that the benchmark 10-year US Treasury bond yield may reach 1.9% before the end of the year-up 23% from Wednesday’s closing price.
“The first is inflation. It’s everywhere,” he said in an interview with CNBC’s “Trading Nation” on Wednesday.
Schumacher also saw expectations of how the Fed will react as an upward momentum in yields. He pointed out that some central banks, including Norway and New Zealand, have adjusted their policy interest rates.
“The Fed may downsize [and] Announce next month,” he said. “In our view, this will push up yields. It will rise a bit more, and then it may fall in December. “
At that time, Schumacher expects investors to be upset about the debt ceiling, government funds will make a comeback and lower yields.
But Schumacher, who is short on bonds, believes that the decline will be temporary.
“All of this can be traced back to inflation,” he said. “It will exist for a while, and it really affects our market prospects.”
The latest economic data indicate higher-than-expected inflation. The US Department of Labor reported on Wednesday that the consumer price index rose 0.4% last month and 5.4% year-on-year. This is the highest year-on-year increase in 30 years.
“[This is] It’s not just an American issue. At this point, it is indeed relevant to the entire industrialized world,” Schumacher pointed out.
Despite concerns about inflation, Schumacher does not belong to the stagflation camp, which refers to the pressure to push up prices during periods of slowing growth.
Stagflation is “exaggerated”
“Frankly, this is exaggerated,” he said. “People will say,’Oh, next year’s growth rate will be slower than this year.’ Well, well, that’s true. But the question is, will the growth in 2022 really disappoint? We don’t think it will. And, if you have growth in the United States, it’s 2[percent]-add. This may not be true stagflation. “
Since the throes of the pandemic, he has been optimistic about economic growth. In December last year, Schumacher told the “Country of Dealers” that the Covid-19 vaccine will greatly boost people’s confidence in the economy and push up the yields of national debt. Since his interview, the 10-year Treasury bond yield has risen 72%.
From an investment perspective, Schumacher will only consider holding long-term bonds as a short-term place to avoid stock market volatility. He found that Treasury bond yields were not attractive to long-term investors because they could not keep up with inflation.
Schumacher said: “The Fed is very concerned about this, and Chairman Powell has made this very clear.” “We do think this will prompt Mr. Powell to advocate for a gradual reduction in production within a few weeks.”