This Market Says Maybe America Isn't So Great Again Yet

could conceivably slow down. At the very least, there's skepticism that inflation will ever become a problem. Welcome to Benchmark. I'm Scott Landman, an economics editor with Bloomberg News in Washington, and I'm Daniel Moss, economics writer and editor at Bloomberg View in New York. So, Dan, every time I opened my Twitter feed, it looks like President Trump is talking about how the economy is going gangbusters, the market is always at a record high. But I never see him

talking about the bond market. Well, the stock market is easy for Twitter, good economic or financial news. The market goes up with the bond market. It's more complicated strong economic news is often greeted with a decline in the bond market, and the inverse is also true. All right, well, let's bring in our guest for some more insight. David Aider has been following the bond market for thirty years.

He's currently the chief macro strategist at Informa Financial Intelligence, and he's been the number one ranked US government bond strategist by Institutional Investor magazine for more than a decade. He joins us on the phone from Connecticut. David, thanks for being with us on Benchmark. Good to be here. So, David, ask most people to talk about the markets and they'll start talking about the stock market it. But why should people care more about the bond market instead. Well, because

people borrow money, Corporations borrow money. The government borrows a lot of money, not just this government, but governments around the world, and the bond market determines the cost of that money. So if you were to see the bond market, if you were interesting, interest rates rise, for example, presumably people will borrow less and that can have a slowing impact on economic growth, certainly on inflation. So it impacts us in a big, big way. So when people talk

about government borrowing. They're not talking about the U. S. Treasury or the British Treasury walking down to city bank and saying, hey, can I have a loan? They're talking about these securitized lending facilities. So when when the government, when the U. S. Treasury borrows money, now, it doesn't go down to a bank and ask for a loan and fill out an application. It goes to the markets.

And the markets do include banks, um, they include central banks, and they have an auction process which determines what the interest rate is going to be. So there's a demand factor that plays a huge amount um into how much how much it's going to cost the government to borrow money. So it's not quite like you or I going down to a bank, but still there is a market rate that is determined now, the market rate for borrowing. It's more it tells a broader story than just how much

the government has to pay to borrow money. Uh. You know, one of the widely followed benchmarks, just like people follow the SMP five D for stocks, you have the treasury security maturing in ten years. You know, people just refer to it as the tenure. It's a pretty common benchmark and those are currently yielding somewhere around two point four. What does that mean? What? What does that tell? What?

What kind of story does that? Well? You you you can look at the tenure, which indeed is the benchmark, but the treasury market, the the the runs the gamut from you know, short term bills sometimes a matter of weeks to thirty year paper, so that's known as the yield curve. The tenure is merely a point on the yield curve, which has become popular because you know, corporations tend to borrow in the tenure sector and the rest of the world um tends to borrow in the ten

year sector. So two point four is only one um one spot on the curve. You could go down to look at the two year note, for example, which would be something on the order of about one eighty, or go out to the end of the curve to take a look at the thirty year which would be considerably higher, considerably higher, So you have what is known as the

steep yield curve. The interest rate from the short term to the long term has has a spread, but actually not that steep right now, you know, when we're getting into a little bit of the market jargon. Now, but you hear a lot about the yield curve flattening, and people seem to think that that might not be such a great development. What is happening there? How would you? How do you explain it? I'll put my economists head on and offer that it depends. But but what's going

on is this? When when the yield curve is steepening, meaning one the spread between the very short terms borrowing to the long term is wide, it usually tells you, historically that we have a lot of growth in the economy. The set is is is allowing I guess you would say, um for some inflation concerns. The steep deeal curve tells you that the market is concerned about growth and inflation as a as an anecdote or a derivative of growth.

The fact that there are two things going on. Not only has the yield curve been flattening, but it's been flattening only because short term rates arising. Long term rates aren't doing anything, and that is the concern, because that suggests that growth is slowing or will slow at least. The Marcus perception that inflation is going to remain low and that the said might be making a mistake. They might be hiking raising short rates too aggressively. Now let

me just challenge you on that point. The lack of inflation has been a defining characteristic arguably of say the last twenty yes, certainly in the post financial crisis here, and yet economic growth has been solid, if unspectacular. There's been all sorts of warnings since the economy began growing in two thousand and nine that we're on the verge of a double dip, etcetera. Hasn't happened. You short signaling a slowdown? Am I sure signalians slow down? You know,

this time might be different. The The difference might be that that we are facing an era. The next ten years, we're going to see UM a lot more treasury bond issues, a lot more treasury market issuance because the deficits rising, and if this new tax plan goes through, and it likely will, we'll see the deficit rise even more so. The treasury, our government has said that they are going to increase issuance UM at the shorter end of the

yield curve. So you have the Fed hiking, you have more issuance at least in the near term at the short end of the yield curve, So it could be a concern about um simply supply and what the Fed is doing. However, historically speaking, the yield curve has been a very good um predictor or prognosticator of of economic activity. And while it is true we've had unspectacular that's how I would say it GDP growth, but we continue to

have very, very very subdued inflation. And I think that the yield curve is giving us some warning that the Feds hiking in here when inflation is low. This is you know, we're nine years into this expansion and we still haven't seen inflation. We haven't seen it on the income or the wage front, and it we're getting kind of late in the cycle um to see that develop. And I think that's what the bond market is telling us.

So are the bond market and the stock market telling two different stories about the economy, two stories that cannot be reconciled? Are they just telling two sides of the same story. Maybe that the stock market is showing that corporate profits are expected to keep increasing, yet the bond market set well, maybe just not at a spectacular pace. So you know, you're dealing with a bond guy, and as you said earlier, when the economy is doing poorly, me as a bond guy, I'm in my I'm in

my my zone that I like to see that. So I would say that they are telling you two different stories. And one of the stories that's been going on with the stock market. Obviously we have we do have a recovery steady issue, if not spectacular, so we go that. But one of the things that has helped um In fact, maybe the thing that has helped the stock market over these last few years is low interest rates. Why because corporations have been borrowing a huge amount of money, tremendous

amount um. They issue bonds like the government, and what are they doing with that cash. What are they doing with the bonds that raise money for them? They're buying back their own stock. So you've seen you there is less stock out there today then there was five ten years ago, the buy back situation, and so that has been one of the things that has helped prop up the stock market, the fact that they've been using so

much cash to buy back their their own stocks. They're the biggest buyer of the stock market, and that happens when interest rates are low, and the this spread with the corporate bond spread between you know, treasuries and corporate bonds is also very tight. So it makes a lot of sense, but they're not investing, and I think that

that will prove a problem. That's why I think the bond market is more right or more correct than the stock market, because if we do see interest rates rise, or if we were to go into an extended period of the slowdown, I think all that corporate barring could prove to be a problem. Now we've often heard not just from government officials, but from investors as well, this mantra, the U s Treasury market is the largest, most liquid,

most secure asset class in the world. Does what's going on in the US treasury market now reflect things that are going on outside the United States as well as issues like Treasury Department sales, tax plan FED Well, it certainly does. You know, the bond market is I mean our bond market. All bond markets are are international. The the largest holders of US treasuries are overseas, and one of the largest holders are foreign central banks. Well, when they they have had their about of what is known

as quantitative easing meeting. Central banks have been buying bonds to keep interest rates low. They have negative yields in Europe, for example, and so we have we have positive yields. I mean we don't. You don't have to pay the government when you buy a bond. So the point is the point is that the demand for U. S. Treasuries is very much influenced by activity overseas where there is

some growth going on. Absolutely, but there are not a lot of bonds around because other central banks have bought them, and the yields and bonds overseas in many cases are negative. There's something on the order of ten trillion dollars worth of bonds overseas and have a negative yield. Well, if you want a positive yield, come to the US are yields might be low or appears to be low, but at least there's a yield, right, But does that necessarily

mean there's going to be a slowdown? I guess what I'm saying is we've heard this idea multiple times since two thousand and nine, that the economy is headed for a double dip. Hasn't happened. I'm just wondering whether this reflects the relative attractiveness of the US versus others. The other economy that the US is often compared with is China, and yet their bond market very different and much more difficult for foreign investors to access. So, I mean, it

is a good question. And of course, at any given moment in time, you know, we try to make it simple. The yield curve says this UM, and there are these other influences we've We've not experienced, you know, in in my thirty years a lot of time when there's ever been negative yields. So certainly there's a component to that.

There's certainly a component to it. But I do think that we can't dismiss the yield curves shape, or or the low yields that we're having UM as simply a matter of you know, there's there's a strong demand from overseas, you know, because of these negative yields. The fact of the matter is here we are nine years into a recovery. That's a very long time. That's a very long time. So when I say we're late cycle, you know, we're

closer to the next recession than we were now. The yield curve may be hinting at that UM not yet, but maybe on on the radar. But the other thing is inflation, so we're dealing with like we saw today with the with the core CPI number very low, came in a little bit lower than expectations. We look at the other measures of inflation also very very low one point three percent, one point five when we're looking at the Fed's preferred measures, so low interest rates, particularly at

the long end of the Yelk curve. The longer maturities are always a reflection of both current inflation and inflation expectations, whether it's the surveys that come out or other uh known, what the said would call market measures of inflation. Those two are pointing to very low inflation um in the coming months, in the coming year. David will have to wrap it up there. Thanks for explaining that story. It's definitely not something that we normally hear out of President

Trump's Twitter feed at eight. Are great to have you on today. Benchmark will be back next week with our two part year and special. In the meantime, you can find us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app, as well as on Apple Podcasts, pocket Cast, and Stitcher. While you're there, take a minute to rate and review the show so more listeners can find us and let us know what you thought of the show.

You can follow me on Twitter at at scott Landman Dan, you are at Moss Underscore Eco and our guest David isn't on Twitter, but you can find insights from his firm at at I f I Underscore. Financial Benchmark is produced by Topor Foreheads and Magnus Hendrickson. The Head of Bloomberg Podcasts is Francesca Levy. Thanks for listening, See you next time.