BMO’s Davis Says 30-Year Treasury Yields Will Hit 6%

Live from New York. Welcome to the program under surveillance this morning, butting heads with Wall Street egos. Look. The house doesn't win every hand. The house play... Plays the percentages that I... Maybe they hurt some fragile egos on Wall Street that I always had respect for the market. And, you know, I I always tried to look and think, what's the move after the move? If you have an ego, you lose a lot of money. So here's the latest this morning. The treasury secretary, Scott Bessent, defending his I am the house remarks with US yields in a multi decade highs. Traders now turning their attention to a busy week of bond auctions and a CPI print due October 14. Earl Davis of BMO writing, we believe ten year US treasuries are at attractive valuations, but not yet at a buy. We will begin adding when the thirty year crosses 6%, which we see as inevitable. Earl joins us now for more. Oh, welcome. Inevitable is a strong word, my friend. Let's talk about it. What makes it inevitable? Yeah. And I would say Friday's... The market reaction to Friday's employment number reinforced the inevitable. So what makes it inevitable? The market only has the ability to focus on one thing at a time, whether that be inflation or growth or things that impact interest rates. It's actually focused on the interest rate, twenty year highs, twenty five year highs. That tells us that the volatility will increase, and and be high and see 6% because it's a global phenomenon. It's not just a made in US phenomenon, but the focus is on The US now. So that gives us a very high, conviction in seeing 6%. Not only that, I believe there's a high probability we see it this month in October. And the reason why I think we see it this month is, like, you're seeing, is the thing that could reverse the sell off. There's two things that could reverse the sell off in US treasuries. One is the Democrats win the house and the senate, so you you have that locked locked government, so to speak, which is good for markets. So it starts focusing on growth again instead of inflation. But the other thing is treasury intervention. And we believe the treasury intervention in thirty years comes in once you go above 6%. And we're in a bear trend, not a bear market on thirty years. The difference is higher yields. Yes. A bear market's when you get moves of ten, fifteen, 20 basis points in a day. And now we're just on the cusp of a bear market in thirty years, so we could accelerate this move and get to 6% very quickly. Can you describe what intervention looks like, Earl? Yeah. I think it's what you've seen before, right, into buying a bond. It's the Fed and Treasury working together to buy to buy bonds. I think it's QE without a doubt. And the reason why 6% is a trigger, there's two things that that drives 6% being a trigger. The one is thirty year mortgages will be very high, and that's something that could destabilize growth and get growth down. But more importantly, it's The US risk going into a a debt trap. That's where your where your rates are lower, like your rates are higher than your growth. And if you get into that, it becomes a vicious circle in regards to your debt expense. So that's one of the things we're looking out at right now and think the Fed will come in not only a little bit but hard. And we do think it will be a reversal for, call it, six months to a year in the direction of yield. Earl, why then focus on the ten year yields rather than going toward thirty year bonds, which will be the focus of this? Very easy answer. Very easy. Your yield to maturity... And I'll look at The US BMO aggregate. That's a popular index to combination of treasuries, ten year treasuries, and corporate bonds. Your yield to maturity will be higher than your duration. You don't get that often in fixed income. And when you do, what it means is if you buy ten year treasuries or let's call it The US BMO aggregate, a six year six duration. If you buy that and you're wrong by a 100 basis points, you will break even in a year. That is math that is investable. Earl. It's not just feelings, not just a qualitative story. Earl, I do wonder what it would do to inflation if the Fed were to step in and the treasury to start to manipulate yields lower at a time where inflation still is not at the 2% target. Yes. It's a very good question. Because if the Fed and Treasury step in, the thing that happens is your US dollar weakens. So that's just mechanically weakened. So now the big story will be, does growth outpace the weakening? Does dollars... Does money still come into The US? Because now you've really zoomed up the, popped up the the tech story and the buying of the mag seven with lower rates. So it will be a battle then. So I'm not sure how we will end up. That's why I said we'll be good for six months to a year. So, yes, inflation will be a very heightened risk. You'll get weakness in US dollar, but you'll also get a lot more money coming into into The US, from a global investable, location. Oh, that's interesting. That last line, you don't think if we destabilize the dollar, we disrupt the foreign bid? Yeah. It's gonna be... Will destabilize dollar on a stand alone basis. Something has to give so you get a weaker dollar. We kinda seen that in Japan with the intervention there to to say. Having said that, the counterforce to that would be the investable dollars coming into The US, And there will be a significant amount of investable dollars coming into The US because growth is still... The underlying growth is still very good and solid, and now you're boosting it even more. It'll be an interesting battle that time, but we think the the market will no longer be focused on yields following the in... A possible intervention.