My Ridiculously Specific Expectation for 10-year Interest Rates

By Michael Ashton

I try to stay away from making predictions. I don’t see the upside. If I am right, then yay! But after the fact, predictions often look obvious (hindsight bias) and it is hard to get much credit for them. By the same token, if I am wrong then the ex post facto viewer shakes his head sadly at my obtuseness. Sure, I can make a prediction with a very high likelihood of being true – I predict that the team name of the 2019 Super Bowl winner will end in ‘s’ – but there’s no point in that. This is one of the reasons I think analysts should in general shy away from making correct predictions and instead focus on asking the correct questions.

But on occasion, I feel chippy and want to make predictions. So now I am going to make a ridiculously specific prediction. This prediction is certain to be incorrect; therefore, I just want to observe that it would be churlish of you to criticize me for its inaccuracy either before or after the fact.

Ten-year Treasury rates will break through 3% for good on May 10, and proceed over the next six weeks to 3.53%. As of this Thursday, year/year core CPI inflation is going to be 2.2% or 2.3%, and median CPI over 2.5% and nearing 9-year highs. At that level of current inflation, 3% nominal yields simply make no sense, especially with the economy – for now – growing above trend. Two percent growth with 2.5% inflation is 4.5%, isn’t it? There is also no reason for 10-year real yields to be below 1%, so when we get to that 3.53% target it will be 1.08% real and 2.45% expected inflation (breakevens).

As I said, inflation is going up, at least through the summer (and I think quite a bit beyond), and summer is traditionally a difficult time for the bond market (although less so in recent years). So I think the selloff will end by June 28th and we will chop around in a 16bp range – roughly the average range from the last two chop periods – until September 6th. Then we will have a nice little rally to 3.18% as economic reports start to show some softness and the Q3 GDP trackers start to point to a 1-handle report. Also, Democrats will continue to lead in the generic ballot polling, prompting fears that impeachment proceedings for the President will begin once the party takes Congress in the midterm elections. Stocks will do badly for the second half of the year, partly on growth concerns, partly on interest rate concerns and the inflation outlook, and partly on fear that impeachment could damage the Trump business-friendly environment. But stocks will not do so badly so quickly as to trigger a flight-to-quality flow into bonds. Price deterioration will be steady with the S&P 500 dropping to 2329 by November 6th, when 10-year yields will be at 3.23%.

On Election Day, returns will show that voters booted out a lot of Republicans, but a surprising number of old guard Democrats also lose their seats. The House flips to the Democrats, while Republicans retain a slim edge in the Senate. The Democrats surprise everyone by not selecting Nancy Pelosi to be the Speaker of the House, signaling that they have no desire to pursue impeachment against a President whose leadership and behavior they question but against whom no actual crime is alleged. (Moreover, Democrats realize that they would rather contest for the White House in 2020 against The Donald than against some other, less lampoonable Republican). Stocks rally into year-end, but bonds begin the next leg down. By early 2019, although the economy is recording its first quarter of the as-yet-unidentified recession, the Fed continues to tighten, core inflation exceeds 3%, 10-year bonds surpass 4.25%, and stocks resume a downtrend that lasts for much of that year and takes the S&P 500 to 1908.75. The curve never inverts as the Fed keeps chasing inflation higher.

Now, if I nail even 20% of that prediction you’ll be justifiably impressed. But the point of the exercise is less about laying markers on particular outcomes and more about imagining how the bond bear market – because that is what I believe we are now in – will unfold. While I don’t know if my conjecture about how the election and the run-up thereto will hold, I do think it is likely that the midterms will cause more than the usual amount of market turbulence. And this is in the context of markets that have already rediscovered their turbulence somewhat. Now, I may also be completely wrong about inflation, but the number of signposts we are seeing these days about capacity constraints in labor markets and some product markets (and even some commodity markets) indicate to me that this inflation scare is less jump-scare and more Gothic horror novel.

We will turn the next page on that novel this Thursday when the CPI is reported. To ‘listen’ to me read a few pages about inflation, be sure to sign up for my private Twitter feed at and follow my CPI tweets live (I am also starting to put more chart packages and other content on that feed, so sign up! Only $10 per month!)

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