Bond market selloff may be just the beginning - TS Lombard's Blitz

[Treasury bonds is shown on the conceptual business photo]
Andrii Dodonov/iStock via Getty Images

The 10-year Treasury yield (US10Y [https://seekingalpha.com/symbol/US10Y]) is on track to hit 6%, according to Steven Blitz, chief U.S. economist at TS Lombard, who argued that a long bear market in government bonds is only just getting started.

In a research note published Wednesday, Blitz pointed to a technical breakout from a long-term triangle pattern that projects yields rising to around 5.5%—but cautioned that this is merely “an early target but not the destination.”

“I have been telling clients for a long time that the world has changed, what markets are always slow to accept,” Blitz wrote. “Even with this sell-off, the market continues to trade from the long side—bear-traps are a thing.” US10Y was changing hands around 4.57% at press time, up some 30 basis points over the last month alone.

The warning comes as incoming Federal Reserve Chair Kevin Warsh prepares to take the helm on Friday, inheriting a challenging policy environment. Blitz argues that if Warsh holds rates steady at the June meeting despite rising inflation risks and accelerating bank lending, it would effectively constitute an easing of monetary policy.

“Failing to hike in June even if growth is stubbornly steady and far from surging, but with broad inflation risk rising is, in effect, an ease,” Blitz noted.

The economist pointed to several factors driving yields higher: real growth continuing to percolate, bank lending running at twice the rate of core inflation, and the need for foreign capital to fund both federal deficits and domestic capital expenditure. With the net national saving rate at zero, either inflation or real rates must rise to balance the books.

For equity (SP500 [https://seekingalpha.com/symbol/SP500]) investors, Blitz offered a sobering assessment, suggesting the multi-year bull market has run its course. Rising bond yields are becoming “compensatory vs equities,” he wrote, marking the beginning of “a long corrective period for too rich equity market.”
[TS Lombard]
TS Lombard

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