Economist David Rosenberg says he has made a career out of following the herd, and his bond forecast could be considered the latest example.
According to the president of Rosenberg Research, this year’s interest rate shock around the benchmark 10-year Treasury Note is temporary.
“This bond market is so radically oversold,” Rosenberg told CNBC’s “Trading Nation” Friday. “We’re going to peel back to 1%.”
The 10-year return ended the week at 1.41%. It’s up 55% so far this year and is around the 52-week highs. Yields move inversely with debt prices.
The overwhelming fear on Wall Street is that the jump is due to inflation rather than a temporary surge in demand linked to the economic recovery.
“The problem I have with that view is that all of these stimulus are temporary in nature and will roll out next year when we face the proverbial fiscal cliff,” Rosenberg wrote in a recent note.
Nevertheless, Rosenberg does not completely rule out a run to 2%.
“That would be a huge technical overrun,” he said. “A 2% move in the 10 year letter, I’ll tell you, would be the same as 3% plus at the end of 2018. It’s something you want to buy.”
Although he expects inflation jitters to ease, he still sees problems for the stock market. Rosenberg, who was Merrill Lynch’s North American top economist from 2002 to 2009, is known for his bearish calls.
At the moment, Rosenberg is negative about growth stocks of major tech companies and megacaps. However, he doesn’t see rising rates as the main reason why the tech-heavy Nasdaq, which fell 5% last week, was under pressure.
“The reality is, most of them actually peaked and started rolling a few months ago, just below the weight of their own overvalued deductibles,” Rosenberg said.
Rosenberg’s checklist
The market groups on his watch list are cars and homes because pent-up demand during the coronavirus pandemic has been dramatically pulled forward.
In the case of housing, Rosenberg is concerned that it will eventually be hit by an oversupply in the labor market. He predicts it will stifle wage growth, which will keep inflation from accelerating.
Rosenberg warns that the impact would lead to housing price affordability issues to income ratios near 2006 bubble levels.
“We could end up with at least a 15% drop in stock and house prices, which is even more important,” said Rosenberg. “That would be a pretty significant negative shock to assets and create what we used to call the negative wealth effect on spending.”
It’s a scenario he calls very possible, and one that would put inflation jitters on the back burner.
“We won’t be hearing bond bears talking about inflation much longer,” said Rosenberg.
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