'The time to be outrageously bearish on bonds was two years ago,' says Jim Bianco
Jim Bianco, president and founder of Bianco Research, finds 5.25% yields compelling
Well-known veteran 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 for almost two decades, Bianco now sees real value and is reversing his bearish call.
Negative sentiment towards 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, Bianco 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, founder and president of Bianco Research
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 the betting to less than 50%.
The Fed's dilemma, in Bianco's opinion, is this: "hike rates in October and incur the wrath of the president. Don't hike rates in October and incur the wrath of the bond market." While he can't call it one way or another, Bianco 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 horizon, yields need to spike to something like 6% for him to actually start losing money.
Bianco takes confidence in his bet from looking at the inflation assumptions made by pricing in Treasury Inflation-Protected Securities, and he 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 fifteen years rates were abnormally, and artificially, low. "Those yields were not normal," he added. "That was the outlier" and actually yields around 5% are far more standard.
Bianco thinks the era of financial repression has given investors a distorted view of what 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) like in 2025, perhaps commodities in 2026. Bianco believes that 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