By Ben Eisen
The rise in Treasury yields slowed on Tuesday, highlighting skepticism in some quarters that Donald Trump's presidency will usher in a period of rising inflation.
The yield on the 10-year Treasury note, which climbs as prices fall, was up 0.02 percentage point Tuesday at 2.240%, a muted rise after four sharp days of increases. The yield on the longest-term Treasury issue, the 30-year bond, fell 0.01 percentage point to 2.972%. Wednesday morning, the yields were at 2.28% and 3.00%, respectively.
Yields have surged since the U.S. presidential election on the view that Mr. Trump's tenure will generate a period of rising inflation, as he pursues policies such as tax cuts, regulatory rollbacks and infrastructure spending to boost economic growth. Market-basedinflation indicators were already rising before Mr. Trump's victory last week, following sharp declines earlier in 2016.
But some investors say factors including the size of the U.S. debt load could limit the effectiveness of the new administration's fiscal-stimulus efforts. The more debt that is outstanding, the less bang for any given dollar of spending, some say.
These skeptics insist that the bond selloff has gone too far.
"I was rolling my eyes so many times in the past few days that I thought I was going to go blind," said David Rosenberg, chief economist and market strategist at Gluskin Sheff & Associates Inc., of the recent trading action. "The inflationistas have a lot to account for because history is not on their side."
Other quarrels with the pro-inflation narrative focus on the numerous premature inflation calls of the past decade. Some economists and businessmen wrote an open letter in 2010 warning then Federal Reserve Chairman Ben Bernanke that monetary stimulus would have inflationary consequences, a view that now seems thoroughly discredited. Inflation has failed to hit the Federal Reserve's 2% annual target for more than four years.
Lacy Hunt, executive vice president at Hoisington Investment Management Co. in Austin, Texas, has long invested his fund in Treasurys with faraway maturities, reasoning that the economy is too weak to generate inflation that would erode the gains on those securities.
Since the election, he has been bombarded with calls from clients wondering whether the current bond selloff is the final death knell for the bond rally that began in 1981.
The yield on the 10-year Treasury note climbed on Tuesday to its highest since the beginning of the year, suggesting lower bond prices. A bond-market gauge that compares nominal Treasury yields with their inflation-protected counterparts forecasts that inflation will climb at 1.86% annually over the next 10 years, up from 1.36% in July, according to Tradeweb.
Mr. Hunt's answer: No way.
"There is always this rush to judgment when there's a major policy change," he said. He said he is investing all new client money in long-term Treasurys, those maturing in 10 or more years.
One reason he believes inflation is set to stay low is the nation's $19.8 trillion debt load, which has grown steadily over time. The increase in debt stands to make each dollar go less far in spurring growth, he said. Between 1952 and 1999, it took about $1.70 in nonfinancial debt for gross domestic product to grow by $1. In the year through June, it took $4.90 to do the same, Mr. Hunt found.
The national debt could increase $5.3 trillion over a decade should Mr. Trump cut taxes and boost spending as he has said during the campaign, according to the nonpartisan Committee for a Responsible Federal Budget.
Even after stimulus projects are completed, their impact on inflation isn't necessarily positive.
Improving roads and rails to make transportation more efficient can actually cut per-unit costs, said Mr. Rosenberg. He cited President Franklin Roosevelt's New Deal spending package and President Dwight Eisenhower's highway construction as big stimulus packages that didn't in their own right boost prices.
Market factors like higher interest rates and a stronger dollar may also have a damping effect on inflation because they can restrain the economy.
Many investors nevertheless believe inflation is headed higher as part of a broader economic reckoning. Prices had been rising since the months before the election, when interest rates hit new lows in the U.S. and elsewhere, and a policy pivot could turbocharge it, some say.
"There is a good chance that we are at one of those major reversals that last a decade," said Ray Dalio, chairman and chief investment officer at Bridgewater Associates, in a LinkedIn posting Tuesday. He suggested inflation was set to climb.
Even those who don't see inflation in the cards suggest that some elements of Mr. Trump's policy proposals may work toward that purpose, such as his vow to cut the corporate tax rate to 15% from 35%.
Yet the experience of tax cuts during President Ronald Reagan's administration suggest this took a long time to filter through to the economy, according to Mr. Hunt.
Write to Ben Eisen at firstname.lastname@example.org
(END) Dow Jones Newswires
November 16, 2016 08:20 ET (13:20 GMT)
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