The Daily Prophet: Carville Was Right About the Bond Market
In the 1990s, the Democratic political adviser James Carville said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Right now, looks like bonds have the rest of the financial markets pretty intimidated, with global stocks falling the most since August.
Carville's remarks came after proposals by the Clinton administration to spur the economy in 1993 were stymied by concern about how bond investors would react to increased debt and deficits. A quarter of a century later, the Trump administration will as soon as this week start outlining its plan to boost borrowing to pay for tax reform and a rising budget deficit. And just like in the early 1990s, the bond market is responding by pushing yields up, this time to their highest since early 2014. The prospects for higher borrowing costs look like they may be spooking the equities market. “We are entering a new era in the U.S. with where the 10-year is headed,” Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co., told Bloomberg News. “Once rates start to rise precipitously, that’s a problem for the stock market.”
Two weeks ago, when the benchmark Treasury 10-year note yielded 2.55 percent, Bloomberg News' Michael Regan reported on a research report by Leuthold Group's chief investment strategist, who said the weakest returns in stocks came after the yield rose to more than one standard deviation above the downward trendline it's traced out since 1980. At the time, that one-sigma level was 2.44 percent. The yield today reached 2.70 percent.
MORE BAD NEWS FOR STOCKS
The stock market, which was down the most since Aug. 17 in late trading based on the decline in the MSCI All Country World Index, might have another problem besides rising interest rates. The rally in equities since mid-2017 had been underpinned by signs of a strengthening global economy. But in the last few weeks, stocks continued to march higher even though the Citi Economic Surprise Index, which measures data that exceed forecasts relative to those that miss, turned lower. Nobody is ready to throw in the towel on stocks, and the weakness Monday just may have been a logical pause following the best start to a year since 1987, but there's a palpable sense of concern among global finance executives. That was evident last week at the World Economic Forum in Davos, Switzerland, as the leaders of Barclays, Citigroup and the Carlyle Group all warned of parallels between today’s soaring stock markets and the froth of the precrisis years. “You’ve got markets at record highs, and, as we know, these things don’t go in a straight line,” James Gorman, Morgan Stanley's chief executive officer, said Jan. 24 in an interview on Bloomberg Television.