I Think this is Worth Reading…

This piece is by: Ben Kizemchuk

Senior Investment Advisor and Portfolio Manager at Wellington-Altus. Tweets are not investment advice.

What I think he is saying is what I happen to believe and have spoken to at points, and that is that the end result of all the current hoopla over higher rates will burn itself out with lower rates sometime down the road. In the meantime what is driving things is a Trump Manipulation downdraft that could clean out some issues, including speculative investments.

Ben: “Everyone is focused on higher yields, but the 2s30s curve is still flattening relative to its recent trend, which suggests to me the bond market is not actually pricing an acceleration in real economic growth at all. That’s exactly what you’d expect if fiscal and AI capex are boosting nominal activity while doing relatively little to create the broad-based credit expansion needed for sustained real economic growth. If investors believed the AI boom was about to spill over into a broad economic expansion, you’d typically expect a steeper curve. Stronger growth would push up long term real growth expectations, lifting 30-year yields relative to the front end. Instead, the market is seeing higher nominal rates while becoming less convinced about the durability of future real growth. In that sense, higher yields and a flatter curve coexist. The mistake is assuming that because nominal growth is holding up and yields have risen, the economy must be entering a structurally higher rate regime. Today’s higher yields are not the beginning of a secular move upward in my opinion. They are the market debating how much fiscal spending and AI investment can temporarily support nominal growth. Eventually, those forces run into the reality that real growth remains scarce. Once investors recognize that the AI buildout is an investment cycle rather than a self-reinforcing economic cycle, attention shifts back to underlying demand, productivity, demographics, and credit creation. At that point, the bond market stops focusing on nominal growth and starts focusing on the lack of real growth. That’s why I continue to think this ultimately resolves with lower rates, not higher rates. The path may involve periods of rising yields as markets reprice fiscal policy coordination but the endgame is likely lower long-term yields as growth expectations converge toward a slower reality. The curve is hinting at that in my opinion.”