Moneybeat: Reading the bond market

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MARY REICHARD, HOST: Coming up next on The World and Everything in It:

The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he’s here now. Good morning, David.

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: David, let’s talk long-term interest rates. The New York Times reports that the yield on the 10-year Treasury has climbed to 4.7 percent—its highest point of President Trump’s second term. The paper points to several possible causes: the Iran war, higher oil prices, and heavier government borrowing.

Treasury Secretary Scott Bessent has called the 10-year yield a barometer of the administration’s success on affordability. Is that the right measure? And by that measure, is the administration losing ground?

BAHNSEN: Well, I want to do a little explanation for listeners that I think is going to be very helpful here this morning to give us a level reset on how all this works. The 10-year bond yield is the most important metric in all of economics. It is the thing that I consider to be the most important measurement. It’s the most liquid instrument. It is deeply held. It is global. It is risk-free, so it is purely measuring interest rates and, and economic growth expectations, devoid of other credit risk and currency considerations, so it’s pretty well isolated.

However, it’s a barometer of two things, and that’s where I think the secretary may have missed the mark in his comment, because nominal GDP growth is more or less the expectations of nominal GDP growth is more or less going to be measured in a 10-year bond yield. However, nominal GDP growth means two things: inflation expectations and real growth.

So I’m making up a number here, but if we had a 5% 10-year with 1% inflation, meaning 4% real growth expectations wouldn’t everyone consider that a wonderful thing? That’s the barometer you love. And then inversely, if we had a 2% 10-year, because we had only 1% inflation expectation but only 1% real growth, would anybody think that’s a good thing?

So I believe that the tenure measures two things. One of them is bad, and one of them is good, and you have to capture both. And to the extent the tenure goes higher, and this is the essence of your question: Is Secretary Besant failing by his own measurement because the tenure is going higher in concert with higher price expectations, that would be a negative.

However, I if the tenure was at 4.6 or 4.7 where it is now, and inflation was down at 2% I’d be thrilled for 2.7% real growth. We’ve been getting one and a half to 2% for a long time, so I just don’t think the 10-year bond yield, without more information about growth and inflation, is enough.

And I think that that is where the press has to understand this. The administration certainly does understand it, but when sometimes people are saying, "Oh, I really hope the tenure goes down to 3%, three and a half. If what they mean is it’s because I hope inflation drops, I get it. But people have to understand you’re not getting a tenure with a three in front of it unless we have really bad economic growth, and that’s not what any of us want.

So hoping for a bond yield that misprices things or is indicating bad economic growth-that’s not something anyone should be rooting for. The, the sweet spot has been around four. The problem with our four is that it’s become more two and a half to three inflation, one and a half or so growth. I want to reverse that. I want inflation below two and growth above two.

EICHER: So how does the bond market separate those two—and when it looks ten years out, how much weight does it put on a temporary oil-price shock rather than persistent inflation expectations?

BAHNSEN: Bob Rubin, the Treasury Secretary during the Clinton administration, did something brilliant. They created something called TIPS, Treasury Inflation Protected Securities, that investors can buy, that people that sold all over the world. That’s trillions of dollars of our government’s debt is actually a lower yield, but then it attaches to it the inflation rate, so it gives investors the protection from inflation. So you can isolate what the expectations for inflation are. That includes food and energy.

But the reason we strip when you’re talking about core versus headline, the reason we strip it out month over month and quarter over quarter is because of the volatility. But over 10 years, it’s, it’s expected it’s going to be lumpy along the way. But the 10 year level is the 10 year level.

And, and this notion that bond yields go higher because this week oil prices were higher and next week they’re lower. It’s ridiculous. The 10 year is going higher because of structural expectations. Goods inflation was at 0% when President Trump took office, and it’s now 1.7%. That’s meaningfully moved higher because we always have higher services inflation, shelter, and other things that fit in there, but goods inflation has come way up, and I believe tariffs are the reason for that.

EICHER: Well, let’s talk about that, talk about tariffs. You’ve said all along that if the courts struck down the administration’s early tariff program, the White House had other legal authorities ready as a backup.

So that has now happened: The Supreme Court struck down the original regime of tariffs, and the administration has begun rebuilding tariffs through other provisions of law. So what is the new economic environment? Did the Court materially reduce the tariff burden—or has the White House largely restored it by another route?

BAHNSEN: Oh, I, I think that the Supreme Court did the administration a huge favor by striking down about 120 billion dollars of tariffs, and the administration has done themselves a huge disservice by bringing back what was about 50 billion, and then now this week they’re going to get about another 12 billion back in through the back door for six months, and it’s bad for two reasons.

First of all, is just the cost of it. It is a literal cost to the U.S. economy that American import businesses pay at a time when small business does not need this tax, at a time when the economy does not need this burden. However, it’s really a problem too, Nick, because it adds to the instability and erratic nature of policy, the unpredictability.

I saw some comments from Australia this week just saying, "What in the world is going on? They haven’t done anything to agitate, and, and they thought they had a deal and then now they’re caught into some new you know tariffs on this stuff and I think that that’s a really big problem not, not only for our counterparties in in other countries but for American businesses themselves when you just kind of don’t know what to expect it’s hard to make hiring plans. It’s very hard to make capex plans to, to make put a shovel in the ground when, when these things are changing the way they are.

Look, the administration could change their mind next week. You know, they coffee prices were getting high, and they go, okay, never mind. And home appliances were getting high, and they said, never mind. Everyone talks about how mad they are about housing prices, but no one seems to want to take away tariffs on lumber, which is just absurd that we’re tariffing wood.

So I just, I really wish that the administration would take the gift, because it would be a real blessing to the economy to have these things removed. They’re still lower and substantially lower than they were a year ago because of the Supreme Court’s ruling. But yes, as you say, what the administration did this week is formally announced their ways to try to work around it, and, and it’s good for at least six months.

EICHER: Finally, jobs. The Wall Street Journal reports that initial jobless claims fell to 187,000—far below expectations—and have now declined for six straight weeks.

How much signal is there in those numbers? And more broadly, does what you’ve talked about for months: the “low hire, low fire” market… does that describe a sturdy labor market—or one that is simply stalled?

BAHNSEN: The job market feels reasonably sturdy, and the weekly jobless claims are the best measurement of that. I don’t want to put too much credence in the 187,000 because, as I’ve been saying now for so many years with you, it’s just kind of fun to be able to say that we’ve been talking about this as many years as we’ve been doing this together.

But you really need like 234-week averages because you get lumpy data, you get a spike of something that sometimes can be double reporting, or you get states that missed reporting, you get seasonal factors, and three-week averages are low and they’re very healthy, and, and the weekly unemployment claims have been low and healthy for years, so there’s a lot of consistency there.

But going from around 210 to 220,000 a week to all of a sudden 187. That’s not going to hold. This week was an anomaly, but we’ll see how those average out.

My only concern: I want to get the BLS number in August for the month of July and see what revisions were for May and June, because the last, the last monthly number was not very good. And the last monthly number was even worse with revisions to the past couple months, so we’re we’re in a kind of summer seasonal watch moment on the labor data.

What I can safely say is that it has not gotten a lot worse from the precarious position it started the year and that’s a good thing, but I don’t think it’s gotten a lot better either. We’re just in this mode where there doesn’t appear to be a lot of hiring, but thank God there doesn’t appear to be a lot of firing.

EICHER: David Bahnsen is founder, managing partner, and chief investment officer of the Bahnsen Group. He writes at dividendcafe.com and also at WORLD Opinions from time to time. David, have a great week, and we’ll see you next time.

BAHNSEN: Thanks so much, Nick.

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