The “soft landing” that some experts thought was on the way may not happen at all. This is causing economists to be concerned.
What’s going on with the U.S. bond market is the biggest clue.
Bond yields have now reached a high of 4 percent and could reach 5 percent in the near future. This instability is causing the market to be unstable, which will lead to more economic pain. Some analysts believe that part of the issue is that no one can predict what will happen next.
The yields of the 10-year Treasury note, the 5-year Treasury bill, and the 30-year Treasury bond have reached their highest level since 2007. Tuesday, the 10-year Treasury yield was 4.8%. Bianco believes that 4.5% is a fair price.
“We are just a bit over fair value at the moment,” Bianco noted that what he sees in the bond markets is a capitulation. “Bond investors and bond managers were long for most of the year. They have been trying to explain why there will be a recession. Why there will be a rally? They’ve had their brains beaten in and can’t stand it any longer.”
The bond market volatility is spreading to the stock market. The Dow Jones Industrial Average has had its worst day since March and now is negative for the entire year. S&P 500, Nasdaq Composite, and Dow Jones Industrial Average also ended the day with a loss of more than 1%.
It’s possible that bond rates will rise further before they get better.
Tuesday, the yield on 10-year Treasury notes rose by 0.119 percentage points to 4.801%. This is the highest since August 2007, when the subprime Mortgage Crisis began. Wall Street saw the Dow Industrials fall by about 431 points or 1.3% and give up their gains for the past year. S&P 500 fell 1.4%. The Nasdaq Composite, which is heavily technology-based, fell 1.9%.
The recent rise in borrowing costs, along with the accompanying drop in stock prices and a stronger dollar, could slow down the U.S. economy and the global economy over the next 12 months. The rapidity of the rise increases the likelihood of financial market breakdowns.
It appears that the most likely causes are a combination of optimism about a better U.S. economy and concerns over how investors will cope with such hefty debt.
While the Fed may be nearing the end of its rate-hike cycle, the economy still appears to be very unstable. While all of this is going on at the macro level, the micro level is just as chaotic. The Fed has set a goal of 2 percent for inflation, but the rate is still far from that. American consumers remain concerned about the economy.
Confusion is caused by the fact that economists cannot explain why anything is happening. A lack of answers will make it difficult to formulate a coherent economic policy, and more frustration is likely. This is also happening at the same time as a major federal electoral cycle, which could lead to an economic disaster just before the presidential campaigns really get started.
