Wells Fargo makes bearish bond call, cites supply chain crisis as risk

Wells Fargo makes bearish bond call, cites supply chain crisis as risk

Inflation, whipped up by the supply chain crisis, will push bond yields larger over the subsequent a number of weeks, in line with Wells Fargo Securities’ Michael Schumacher.

The agency’s head of macro technique believes the benchmark 10-year Treasury Word yield may attain 1.9% earlier than year-end — a 23% bounce from Wednesday’s shut.

“Number one is inflation. It’s everywhere,” he advised CNBC’s “Trading Nation” on Wednesday.

Schumacher additionally sees anticipation surrounding how the Federal Reserve will react as an upward driver for yields. He notes a couple of central banks, together with Norway and New Zealand, have already adjusted their coverage charges.

“The Fed is probably going to taper [and] announce it next month,” he mentioned. “It’s going to push yields up in our view. It will go up a bit more, and then probably drop in December.”

That is when Schumacher expects investor jitters over the debt ceiling and authorities funding will make a comeback and drive yields decrease.

However Schumacher, who’s bearish on bonds, believes a transfer decrease could be momentary.

“This all goes back to inflation,” he mentioned. “It’s going to be here for a while, and this is really coloring our market outlook.”

The most recent financial numbers spell hotter than anticipated inflation. The Labor Division reported on Wednesday the patron worth index elevated 0.4% final month — a year-over-year acquire of 5.4%. It is the very best year-over-year acquire in additional than three a long time.

“[This is] not just the U.S. issue. It really relates to the entire industrialized world at this point,” Schumacher famous.

Regardless of his inflation considerations, Schumacher will not be within the stagflation camp, which refers to pressures that push costs larger during times of slowing development.

Stagflation is ‘overplayed’

“It’s overplayed, frankly,” he mentioned. “People say, ‘Well, gee, growth is going to be slower next year that this year.’ Well, okay, that’s true. But the question is by how much, and is growth really going to be seriously disappointing in 2022? We think not. And, if you have growth in the U.S. that’s 2[percent]-plus. It’s probably not really stagflationary.”

He has been bullish on financial development because the throes of the pandemic. Final December, Schumacher told “Trading Nation” the Covid-19 vaccines would dramatically boost confidence in the economy and push Treasury yields higher. Since his interview, the 10-year yield is up 72%.

From an investment standpoint, Schumacher would only consider owning a long duration bond as a short-term place to hide out from stock market volatility. He finds Treasury yields unattractive for long-term investors because they’re not keeping up with inflation.

“The Fed is very concerned about this, and Chairman Powell has made this pretty clear,” Schumacher said. “We do think that’s going to push Mr. Powell to argue for tapering in a couple weeks.”

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