Its funny talking about interest rates. Whenever I say I think long bonds are going to 10% - people with mortgages look like I basically said the world is going to end. I will keep this short - as it is a very simple analysis. Essentially, I think we are in a pro-labour era that sees the back end sell off until political change comes. We are at 5% now, I could see an Iran war sell off drive that to 6%. This is NOT unreasonable in my view.
Back in the 1970s, short term bond yields tended to trade ABOVE long term yields. That is central banks had to work HARD to keep government driven inflation in check. When governments have deflationary policies, central banks just need to raise short term rates to where long term bond yields are to create deflation. When government have inflationary policies, short term rates need to be above long term rates. We have seen this inflection already, when the yield curve became heavily inflected in 2023, and every macro strategist screamed recession - but none came.
Just like in the 70s, the 2 - 30 spread is moving lower again - and in my view back to be 100 points over the 30 year. So as I said, I think the 30 year heads to 6%, this implies 7% for 2 year treasuries. Is the market ready for that? Absolutely not! Fun times for short sellers beckon.
