2018 has shown itself to be the year that the warm comfort of extraordinary monetary stimulus has begun to be removed by the world’s main central banks. The $18 trillion U.S. economy is growing briskly; wages have finally risen to a point where we can start to think about wage inflation; and, with the nation’s economy at or near full-employment, we have a large dose of fiscal stimulus flowing through in the form of historic corporate tax cuts. As a result, interest rates have risen sharply in the first two months of 2018, with the one-year Treasury bill pushing through a 2 percent yield for the first time in nearly 10 years. Meanwhile, the 10-year Treasury yield has risen sharply, recently approaching the important psychological barrier of 3 percent.
The question to be asked is: Has the great 30-year bond bull market come to an end? Has the inflation genie finally broken out after being scourged in the late 1970s-early 1980s and, if it has, is the Federal Reserve “behind the curve?”
Recently, three famous investors, Bill Gross, Ray Dalio and Paul Tudor Jones have weighed in on the side of the bond bull’s demise. I thought the most interesting comment came from Jones, who commented not only on bonds but also on risk assets (like equities and other credit sensitive assets) when he said, “With rates so low, you can’t trust asset prices today. If you can’t tell by now, I would steer very clear of bonds.”
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