Banananomics: Important Economic Surprises From The Bond Market

While this year's equity momentum has kept Wall Street distracted, the benchmark 10-year rate has increased by 83 basis points since 2023.

Inputs that matter: Yields move inversely to bond prices, meaning lackluster demand increases rates.

• That's why Treasury auctions have become attention-grabbers for markets, as investors watch to see if there are enough willing buyers.

• Both the Treasury Department and Federal Reserve have made liquidity adjustments this week to take pressure off buyers, but whether these efforts are enough is to be seen.

• While Treasury auctions fell on Friday after a so-so jobs report, markets are still warily eyeing further moves upward amid sticky inflation and broad economic strength. 

The opportunity: Treasury bonds might not be the most high-octane trade, but yields rising not that far from current levels could eventually make things all but boring. 

• "Bond king" Bill Gross is among those touting caution, telling investors that high federal borrowing will push yields to 5% levels within the next 12 months.

• Once this threshold is crossed, investors could be in for a sharp stock correction. 

Zoom in: "Sloppy" auctions caused the bond rout last fall, market veteran Ed Yardeni told Business Insider.

• He said that America's exploding debt has turned off many buyers, and with few efforts to clamp it down, more disappointing auctions could be in store.

Between the lines: According to the Bureau of Economic Analysis, first-quarter growth in the U.S. fell well behind estimates, rising at an annualized rate of 1.6%.

• "This was a worst-of-both-worlds report—slower than expected growth and higher than expected inflation," wrote David Donabedian, chief investment officer of CIBC Private Wealth U.S.

• It's also bad news for the economy, as sputtering growth and higher prices are the key ingredients for stagflation, characterized by economic listlessness and stubbornly elevated inflation over a prolonged period.

• The last episode of stagflation in the U.S. occurred during the 1970s.

• To finally reign things in, then-Fed Chairman Paul Volcker was forced to raise interest rates by a staggering 20%, calming price highs but throwing the U.S. into a deep recession.

Follow the money: Fed funds futures trading data suggests just one interest rate cut this year, according to the CME FedWatch Tool.

• The benchmark 10-year Treasury yield is hovering below levels that caused a massive crash last fall.

• Separately, a New York Federal Reserve survey released Monday showed that the share of renters who believe they will be able to afford a home fell to a record low of 13.4%.

• Respondents expected rental costs to increase by 9.7% over the next year.

With the BRICS alliance further pursuing its de-dollarization efforts, a significant crash in the U.S. economy has begun, touts Robert Kiyosaki, author of Rich Dad Poor Dad.

Inputs that matter: Kiyosaki told his followers on X that "the crash has begun," he further stated, "It will be a bad one."

• There is no understatement of the fragility the U.S. economy has found itself.

• In an earlier interview, Mark Spitznagel, the chief investment officer of Universa Investments, told Bloomberg that we're witnessing the "greatest credit bubble in human history."

• Fed Chair Jerome Powell underscored that wait-and-see approach in his remarks last week after the central bank held rates steady. The traders currently see just two quarter-point cuts by year-end.

• According to Fed statistics, the amount of debt held by households and non-profits has surged 90% since the start of 2022 to a record $5.7 trillion.

The opportunity: Multiple experts have expressed their concern that the U.S. Debt crisis could become far more catastrophic than current inflationary pressures.

• Last year, investors pocketed nearly $900 billion in annual interest from U.S. government debt, double the average over the previous decade.

• "With the help of our friends at the Fed, they did put the income back in fixed income," said Anne Walsh, chief investment officer of Guggenheim Partners Investment Management. 

• "And fixed-income investors, we reap the benefits of higher yield. That's a good thing."

Zoom in: To move away from the G7's use of the U.S. Dollar (USD), competing BRICS members China and Russia signed a trade agreement allowing them to use local currencies to settle commodities trades.

• Today, more than 90% of the nation's bilateral trade dealings are settled in the yuan or ruble.

• Meanwhile, in Venezuela, Tether, a cryptocurrency pegged to the USD, is used for oil export transactions to avoid having revenues frozen in foreign bank accounts.

Between the lines: "This was a worst-of-both-worlds report—slower than expected growth and higher than expected inflation," wrote David Donabedian, chief investment officer of CIBC Private Wealth U.S.

• It's also bad news for the economy, as sputtering growth and higher prices are the key ingredients for stagflation, characterized by economic listlessness and stubbornly elevated inflation over a prolonged period.

Follow the money: In February, the Congressional Budget Office projected that interest and dividends paid to individuals will rise to $327 billion this year.

• After accounting for inflation, yields are now back above 2%. 

• The last time that happened on a sustained basis was before the 2008 financial crisis.

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