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Economist David Rosenberg says he made a career by not following the herd, and his bond forecast could be considered the latest example.
According to the Rosenberg Research president, this year’s rate yield shock surrounding the benchmark 10-year Treasury Note is temporary.
“This bond market is so radically oversold,” Rosenberg told CNBC’s “Trading Nation” on Friday. “We’re going to peel back to 1%.”
The 10-year yield ended the week at 1.41%. It’s now up 55% so far this year and is around 52-week highs. The yield moves inversely to debt prices.
The overwhelming fear on Wall Street is the jump is due to inflation rather than a temporary demand surge linked to the economic recovery.
“The problem I have with that view is that all this stimulus is temporary in nature and rolls off next year when we face the proverbial fiscal cliff,” Rosenberg wrote in a recent note.
Yet, Rosenberg won’t completely rule out a run to 2%.
“That would be on a huge technical overshoot,” he said. “A 2% move in the 10-year note I’ll tell you would be the same as 3%-plus in late 2018. It’s something that you want to buy.”
Even though he expects inflation jitters to subside, he still sees trouble for the stock market. Rosenberg, who served as Merrill Lynch’s top North American economist from 2002 to 2009, has been known for his bearish calls.
Right now, Rosenberg is negative on big tech and mega cap growth stocks. However, he doesn’t consider rising rates as the main reason why the tech-heavy Nasdaq, which declined 5% last week, has been under pressure.
“The reality is that most of them actually peaked out and started rolling over several months ago just under the weight of their own overvalued excess,” said Rosenberg.
Rosenberg’s watch list
The market groups on his watch list are autos and housing because pent-up demand during the coronavirus pandemic has been dramatically pulled forward.
In housing’s case, Rosenberg is concerned it will ultimately get hit by excess supply in the labor market. He predicts it will suppress wage growth which will prevent inflation from accelerating.
Rosenberg warns the impact would spell affordability problems with home price to income ratios near 2006 bubble levels.
“We could end up with at least a 15% decline in stock prices and in housing prices which is even more important,” noted Rosenberg. “That would be a pretty significant negative shock on assets and create what we used to call the negative wealth effect on spending.”
It’s a scenario he calls quite possible, and one that would put inflation jitters on the back burner.
“We’re not going to be hearing the bond bears talking about inflation much longer,” Rosenberg said.
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