I try to stay away from making predictions. I don’t see the upside. If I am right, then yay! But after the fact, predictions often look obvious (hindsight bias) and it is hard to get much credit for them. By the same token, if I am wrong then the ex-post facto viewer shakes his head sadly at my obtuseness. Sure, I can make a prediction with a very high likelihood of being true – I predict that the team name of the 2019 Super Bowl winner will end in ‘s’ – but there’s no point in that. This is one of the reasons I think analysts should, in general, shy away from making correct predictions and instead focus on asking the correct questions.

But on occasion, I feel chippy and want to make predictions. So now I am going to make a ridiculously specific prediction. This prediction is certain to be incorrect; therefore, I just want to observe that it would be churlish of you to criticize me for its inaccuracy either before or after the fact.

Ten-year Treasury rates will break through 3% for good on May 10, and proceed over the next six weeks to 3.53%. As of this Thursday, year/year core CPI inflation is going to be 2.2% or 2.3%, and median CPI over 2.5% and nearing 9-year highs. At that level of current inflation, 3% nominal yields simply make no sense, especially with the economy – for now – growing above trend. Two percent growth with 2.5% inflation is 4.5%, isn’t it? There is also no reason for 10-year real yields to be below 1%, so when we get to that 3.53% target it will be 1.08% real and 2.45% expected inflation (breakevens).

As I said, inflation is going up, at least through the summer (and I think quite a bit beyond), and summer is traditionally a difficult time for the bond market (although less so in recent years). So I think the selloff will end by June 28th and we will chop around in a 16bp range – roughly the average range from the last two chop periods – until September 6th. Then we will have a nice little rally to 3.18% as economic reports start to show some softness and the Q3 GDP trackers start to point to a 1-handle report. Also, Democrats will continue to lead in the generic ballot polling, prompting fears that impeachment proceedings for the President will begin once the party takes Congress in the midterm elections. Stocks will do badly for the second half of the year, partly on growth concerns, partly on interest rate concerns and the inflation outlook, and partly on fear that impeachment could damage the Trump business-friendly environment. But stocks will not do so badly so quickly as to trigger a flight-to-quality flow into bonds. Price deterioration will be steady with the S&P 500 dropping to 2329 by November 6th, when 10-year yields will be at 3.23%.

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