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Rising Treasury yields have rocked markets in recent months.
But the dizzying surge to nearly quarter-century highs might be done.
Jim Paulsen says both history and current economic realities say yields are near a peak.
If you’re afraid of another roller coaster in bonds that takes yields back to quarter-century highs, there’s a chance the worst is over.
History points to a simple reason that Treasury yields may be done rising: simply put, they’re already high. Surging yields have sent waves of fear rippling through Wall Street, with the benchmark 10 year Treasury yield reaching its highest point in 24 years this month.
But according to Jim Paulsen, a veteran Wall Streeter and the former chief investment strategist at The Leuthold Group, there may be some good news for jittery investors worried about more bond volatility.
“US yields may surprisingly be nearing a peak for a simple but perhaps more important reason — compared to history, the current 10-year Treasury bond yield is fairly ‘high’!” Paulsen wrote on Thursday.
A lot of people are quick to point out that, relative to prior decades like the 1980s, yields are still low. Paulsen pushed back on that notion, looking at 155 years of history to show that the 10-year bond yield is higher than 76% of monthly readings since 1871.
That doesn’t mean that yields can’t keep rising. Paulsen acknowledged the possibility, noting the upward pressure created by fiscal issues and heavy new supply of both corporate and government bonds.
However, he said there’s another reason yields could remain subdued. In his view, the US is nowhere near an inflationary crisis like the 1970s, and the economy is signaling that prices should cool, reducing the need for more rate hikes from the Federal Reserve .
Strong, consistent demand helped keep prices high during the 1970s , which ultimately made it harder for policy makers to contain inflation. Paulsen argues that’s far from what is taking place in the US today, despite inflation being rising again , albeit for very different reasons.
“Today’s inflationary struggle is due primarily to ‘supply-side’ constraints which are solvable,” he said. “If the US is not headed again for a repeat of the 1970s-80s inflationary blowoff — which seems very unlikely — today’s 10-year yield is indeed among the highest in US history.”
Read the original article on Business Insider
