Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

The concept of alternative realities -- explored widely in books, films and TV shows -- was pulled suddenly into the real-world political realm over the weekend. President Donald Trump's press secretary contended that his boss's inauguration drew an unprecedented crowd, despite verifiable evidence to the contrary. Many media organizations called that lying. But Trump's counselor Kellyanne Conway told a television interviewer that it was simply a matter of "alternative facts."

Normally the bond market doesn't have room for this kind of cognitive duality, but it might be catching, creating something of a split personality if not an outright bizarro world. There's a belief that benchmark U.S. yields are headed upward because of faster economic growth. This expectation has fueled big gains in bank stocks and optimistic outlooks on the part of corporate chief executives and asset managers.

But bond traders are painting a different, much cloudier picture.

They see longer-term growth remaining well below Trump's stated target of 4 percent. In fact, their outlook for economic expansion over the next three decades appears to have dwindled in recent months. You can see this by looking at how much the gap between yields on five-year and 30-year Treasuries has narrowed.

Speed Bump
Bond traders have reduced longer-term expectations for growth in recent months
Source: Bloomberg

Typically, it narrows when traders are pricing in slower growth ahead.

And while longer-term inflation expectations have risen over the past few months, they're still below where they were less than two years ago. You can see this by looking at a gauge of inflation expectations over the next decade called five-year five-year forward breakeven futures contracts.

Still Low
Futures traders are still pricing in low rates of longer-term inflation relative to recent history
Source: Bloomberg

Meanwhile, yields on benchmark Treasuries have generally declined this year. This could all change if U.S. lawmakers pass fiscal stimulus plans that ignite growth. But President Trump has continued his fiery anti-establishment rhetoric, which may be problematic when it comes to garnering support even from members of his own party.

Overshoot
Traders are starting to warm up to bonds again after heavily selling them after the U.S. election
Source: Bloomberg

Alternative realities are slippery, so perhaps growth will pick up more than most bond traders think. But right now, the backdrop looks a lot like the one seen before the election -- slower growth for longer, regardless of eyes that want to see something different.

Bond Market Signals No 4% Growth in U.S.: Abramowicz

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net