Key Takeaways
- • Investing.com commentary questions whether high-profile bond bears Paul Tudor Jones and Stanley Druckenmiller, who have reportedly gone short bonds (betting on higher yields), could be wrong.
- • The article notes longer-term Treasury yields rose roughly 50 basis points the day after the Fed cut rates by 50 basis points, and attributes the bear case partly to fears that a Donald Trump presidency and Republican control of Congress will widen deficits and fuel inflation.
- • The author rejects the main inflation arguments: the 2022-2023 inflation was driven by pandemic-era demand and supply shocks that have normalized, U.S. inflation is correlated with China, the U.K. and the Eurozone (r-squared of .86), and the debt-to-GDP ratio has been flat for two years.
- • The article argues the economy is about $8 trillion, or 33%, larger than before the pandemic, and that M2 relative to GDP sits below its pre-COVID trend.
- • The author concludes that slowing growth and lower inflation trends are reasserting themselves and that deflation concerns could return in coming years.
Summary
Paul Tudor Jones and Stanley Druckenmiller have publicly stated they are short bonds, a position that bets on higher yields. Investing.com argues that investors should not accept such views from legendary traders without scrutiny. The piece notes that both are known for aggressive trading, so it is unclear whether their positions are short-term trades or longer-term bets, and it cautions that public bond commentary can amount to talking one's book.
The article places the bond move in context. Longer-term yields rose about 50 basis points beginning the day after the Federal Reserve cut rates by 50 basis points. Bond bears cite several concerns: the Fed reigniting inflation by cutting while the economy remains strong, fiscal deficits leading to inflation, and, for an emerging group led by Jones and Druckenmiller, a Trump presidency with Republican control of Congress expanding deficits.
Investing.com addresses each argument. It contends that the 2022-2023 inflation resulted from pandemic-era stimulus and supply disruptions that have since normalized, so any renewed inflation would have different causes. It argues the 1970s comparison is inapt. On imported inflation, it cites falling inflation in the Eurozone, China and the U.K., and a regression on those economies that it says implies U.S. CPI would need to fall about 0.3%.
On deficits, the author acknowledges that persistent deficits are a headwind to growth but argues the 'obscene spending' critique ignores that the economy is roughly 33% larger than before the pandemic. The article estimates that removing about $5.6 trillion of COVID relief would place current debt-to-GDP near pre-pandemic levels, and states that M2 relative to GDP is below its pre-COVID trend while money velocity is near early-2020 levels. On Japan, the piece notes Japan's debt-to-GDP of 263% and decades of low yields and deflation, and says following that path would be bullish for bondholders. It concludes that the bearish arguments have merit but are less alarming in context, and that deflation, not inflation, could again become the market's concern.
The article places the bond move in context. Longer-term yields rose about 50 basis points beginning the day after the Federal Reserve cut rates by 50 basis points. Bond bears cite several concerns: the Fed reigniting inflation by cutting while the economy remains strong, fiscal deficits leading to inflation, and, for an emerging group led by Jones and Druckenmiller, a Trump presidency with Republican control of Congress expanding deficits.
Investing.com addresses each argument. It contends that the 2022-2023 inflation resulted from pandemic-era stimulus and supply disruptions that have since normalized, so any renewed inflation would have different causes. It argues the 1970s comparison is inapt. On imported inflation, it cites falling inflation in the Eurozone, China and the U.K., and a regression on those economies that it says implies U.S. CPI would need to fall about 0.3%.
On deficits, the author acknowledges that persistent deficits are a headwind to growth but argues the 'obscene spending' critique ignores that the economy is roughly 33% larger than before the pandemic. The article estimates that removing about $5.6 trillion of COVID relief would place current debt-to-GDP near pre-pandemic levels, and states that M2 relative to GDP is below its pre-COVID trend while money velocity is near early-2020 levels. On Japan, the piece notes Japan's debt-to-GDP of 263% and decades of low yields and deflation, and says following that path would be bullish for bondholders. It concludes that the bearish arguments have merit but are less alarming in context, and that deflation, not inflation, could again become the market's concern.
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