Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Bonds Are on Sale, Get Them While They're Still Cheap

By Michael LebowitzBondsAug 30, 2023 06:12
Bonds Are on Sale, Get Them While They're Still Cheap
By Michael Lebowitz   |  Aug 30, 2023 06:12
Saved. See Saved Items.
This article has already been saved in your Saved Items
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

The previous article discussed the potential ramifications related to policy actions that China and Japan might take. These large U.S. Treasury bondholders could temporarily upset the Treasury market, but as we opined, we do not think they threaten our forecast for lower yields. Like China and Japan, inflation, deficits, and QT are stories bond bears are telling themselves to justify higher yields in the future.

This article focuses on the inflation outlook, burgeoning fiscal deficits, and QT. Like China and Japan, any of the three factors we discuss in this article can briefly upset the bond market. But we do not see inflation, deficits, or QT as a cause of concern for longer-term bond bulls.

Inflation Expectations

Some are starting to worry that inflation is beginning to rise again. For example, Lawrence Summers shares the graph below, implying that prices will ramp back up.

US CPI Chart
US CPI Chart

Given the symbiotic relationship between bond yields and inflation, bearish bond traders are taking notice of new inflation worries. Gasoline, home prices, and some other goods and services are again on the uptick.

While some may be concerned about higher prices, implied inflation, as determined by the bond markets, displays no such fear. As we share below, five- and ten-year inflation expectations continue declining despite bond yields rising sharply.

Yields And Inflation Expectations
Yields And Inflation Expectations

CPI will likely continue lower as lagged inflation reporting on shelter costs will catch up to reality. As we wrote earlier:

CPI with realistic OER and rent prices would be lower than the CPI excluding shelter numbers graphed above. Ask yourself:

What would Fed monetary policy be if inflation was at the Fed’s target?

The quote references the following graph showing that CPI excluding shelter is 1.019%.

CPI and CPI ex-Shelter
CPI and CPI ex-Shelter

Bottom line:

We think inflation readings will be lower in six months, albeit may bounce around current levels for a few months before declining. While some think inflation will rise, the markets, in aggregate, have no such concern as we share with implied inflation rates.

Therefore, it’s tough to pin the recent yield increases on inflation expectations.

Debt and Deficits

Do federal deficits and associated debt issuance correlate with bond yields?

Debt To GDP And Yields
Debt To GDP And Yields

While many fear sharply increasing deficits will push yields higher, history argues the opposite. Since 1980, yields have fallen precipitously while debt to GDP has increased. Why?

Per Hoisington Investment Management’s latest quarterly update:

Estimates from econometric studies of highly indebted industrialized economies indicate that the government expenditure multiplier is positive for the first four to six quarters after the initial deficit financing, then turns negative after three years.

This implies that a dollar of debt financed federal expenditures will, at the end of the day,’ reduce private GDP.

In other words, today’s stimulus is tomorrow’s burden.

Government debt is onerous. Since it is growing much quicker than tax revenue, lower interest rates are required to keep interest expenses affordable for the Government. Further, the burgeoning debt will reduce economic growth and inflation in time.

As we show, debt has grown much faster than GDP, tax revenues, and federal interest expenses. However, due to higher interest rates, interest expense has grown more in the last three years than in the fifty years prior. The recent trend is unsustainable!

Rate Of Debt, Growth Versus Tax Revenue and GDP
Rate Of Debt, Growth Versus Tax Revenue and GDP

Bottom Line:

The market may rightly fret that more debt will increase yields. However, history argues the opposite. The Fed and Treasury know that issuing new debt and rolling over existing debt can’t be done much longer at higher rates.

In early August, The Treasury Department announced that it was comfortable letting the share of bills outstanding increase above the recommended level to 22.4%. In other words, they are trying to avoid locking in higher rates for longer.


The Fed is likely to continue QT even after they pause rate hikes. This means that bonds on the Fed’s balance sheet today must find a new home. While that may appear to be a bearish factor for bonds, it’s worth noting the Fed is not selling long-term bonds.

They are only letting maturing bonds roll off their balance sheet. In fact, each month, they are a net buyer of long-term bonds. The Fed needs to buy bonds when the amount of their maturing bonds exceeds the $95 billion monthly objective.

The regional bank crisis resulted from banks having to realize losses on long-term bonds and loans. Those assets and their unrealized losses are still on bank balance sheets. The Fed is aware that higher yields risk reigniting the bank crisis.

Do not be surprised if the Fed or Treasury initiates some yield control if rates increase. As we said in the deficits section, neither the Government nor the economy can afford higher rates. For more, read our article- The Government Can’t Afford Higher for Longer.

Bottom Line:

QT is a short-term measure employed to normalize the Fed’s balance sheet. We have little doubt that when the time comes, the Fed will again aggressively buy bonds to reduce interest rates and limit the financial fallout of higher rates.

They will do whatever it takes when the time comes!


Like any other financial asset, bond yields trade up and down minute by minute. The media and investors tell stories explaining each move. But often, gyrations are simply a temporary imbalance of buyers and sellers.

China, Japan, inflation, deficits, and QT are frightening stories and headlines. But as we share in this article and its predecessor, they should not worry about bond bulls willing to endure short-term yield volatility for significant long-term rewards.

No doubt, the bearish factors in this article are concerning. That said, we think they dwarf compared to the opportunity that bonds present. Currently, 10-year notes yield 3% more than the long-term trend economic growth rate and trend inflation.

The graph shows the natural economic growth rate is likely around 1%. Earning 4% or more in a 1% economy is the best yield premium bond investors have been paid in well over 20 years.

The real question bond holders need to ask themselves is, are the 60-year economic trends in the graph reversing higher? If yes, rethink bonds. If not, get them while they are cheap!

Fed Estimates of the Natural Economic Growth Rate
Fed Estimates of the Natural Economic Growth Rate

Bonds Are on Sale, Get Them While They're Still Cheap

Related Articles

ING Economic and Financial Analysis
A Structural ECB Bond Portfolio to Benefit EGBs By ING Economic and Financial Analysis - Feb 27, 2024

By Benjamin Schroeder Overall, we think the bearish sentiment can keep going in the near term. For markets, the main focus remains on the assessment of the US macro backdrop, with...

A Difficult Start to the Year for Bond Markets By TrackInsight - Feb 19, 2024

With a Labor Department report showing U.S. consumer prices increased more than expected in January amid rises in the costs of shelter and healthcare, the week did not allow U.S....

Bonds Are on Sale, Get Them While They're Still Cheap

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email