A veteran investor suggests powerful market shift is coming, in favor of bonds.
Cresset Wealth’s Jack Ablin predicts leaping Treasury yields are here to stay — a scenario that could put equity investors in a quandary as the government’s borrowing costs spike.
“I think there’s still a lot to go,” the firm’s chief investment officer said Thursday on CNBC’s “Futures Now.” “[The] 10-Year Treasury yield has been below fair value for nearly ten years thanks in large part to central bank bond purchasing that’s been going on.”
His thoughts came as the 10-Year yield, which moves inversely to debt prices, made another run to 3 percent. On Friday, the benchmark rate hit its highest level in more than 4 years.
“If you take a look long-term, where the 10-Year Treasury typically trades, it matches nominal [economic growth],” Ablin said. “And, the last nominal [growth] number we got in December of last year suggested that the 10-Year Treasury should be about 4.1 [percent] not 2.9,” he added.
Stocks historically become less attractive as yields move higher. In the easy money environment since the financial crisis, low yields created great demand for stocks.
“The fact is that the bond market has been in this tug-o-war for capital for the last ten years with one arm tied behind its back,” Ablin said. “The equity market has essentially been the only child of that relationship.”
With the Federal Reserve normalizing its interest rate policy and the European Central Bank hinting it’ll soon do the same thing, Ablin expects Treasuries to become more attractive.
“We see the 2-Year [Treasury] now nearly at more than 2.4 percent. So, yields are starting to get more attractive on the front end where the Federal Reserve has its influence,” he noted. Shorter-dated yields surged to its highest level since September 2008. In the past year, the yield has surged more than 100 percent.
Ablin, who’s bullish on the 2-Year, said that not even a “fantastic” earnings season will prevent the stock market troubles likely coming down the pike.
“The fact is the European Central Bank has already said they’re likely to end their program in September. So, I think the bond market is starting to sense that, and that’s why we’re seeing rates rise there,” Ablin said.
