He's Been Badmouthing Treasury Bonds Since 2020, but 'the Big Fat Cushion' of 5.25% Yields is Turning This Strategist Bullish

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'The time to be outrageously bearish on bonds was two years ago,' says Jim Bianco

Jim Bianco of Bianco Research finds 5.25% yields compelling.

Well-known market commentator Jim Bianco is turning bullish on Treasury bonds for the first time since the pandemic. With the yield on 10-year U.S. Treasury notes touching 5.25% this week, the highest in almost two decades, Bianco now sees real value and is reversing his bearish call.

Negative sentiment toward inflation, the deficit and the U.S. debt mountain are all justified, according to Bianco, the founder and president of his own research firm, "but that's now largely being reflected in the prices." Interviewed on the "David Lin Report" podcast on Monday, the investing veteran acknowledges that "I'm not going to be smart enough to say 5.25% is the high, but we're getting close enough."

Jim Bianco.

The direction of government bonds may well be determined by expectations for the next Fed meeting on Oct. 26-27. When the show was aired Monday, markets were ascribing a 70% probability to a 25-basis-point hike, although since then more dovish utterances from New York Fed governor John Williams have reduced that betting to less than 50%.

The Fed's dilemma, in Bianco's opinion, is this: that a rate increase in October would "incur the wrath of the president," while not lifting interest rates n October would "incur the wrath of the bond market." He can't call it one way or another, says Bianco, who reckons that being paid 5.25% BX:TMUBMUSD10Y gives him sufficient protection to absorb some losses. In another interview recorded with Bloomberg on Monday, Bianco calculated that, on a one-year time horizon, yields need to spike to something like 6% for him to start losing money.

Bianco takes confidence in his bet from looking at the inflation assumptions made by pricing in Treasury inflation-protected securities, or TIPS, and derives from those that inflation expectations are going to be lower in five years' time than they are now. Bianco is keen to stress that goods inflation is definitely a problem, but his argument is that these chunky 5.25% bond yields compensate investors for that risk.

One problem that markets are encountering with the new higher-rate paradigm, Bianco maintains, is that for almost 15 years rates were abnormally, and artificially, low. "Those yields were not normal," he added. "That was the outlier," while yields around 5% are far more standard.

Bianco thinks the era of financial repression has given investors a distorted view of the returns they should expect from stocks and bonds. They have become accustomed to finding 20% a year from the S&P 500 SPX, or gold (GC00) and silver (SI00) as in 2025, perhaps commodities in 2026. Bianco says returns of 4% on cash, 5% on bonds and 6% on stocks is a more realistic expectation and more sustainable.

His conclusion is that earning 5.25% while inflation is around 3% is a bargain investors should make. They shouldn't expect to double their money every two years. On a risk-adjusted basis, Bianco advises that bonds are a better investment right now.

-Jules Rimmer

 

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