The Biggest Contrarian Trade Of 2023
It'd be highly unusual if US Treasurys suffered another year of negative returns.
In fact, according to data sets which append historical records to conventional series to reconstruct returns for longer timelines, a third consecutive year of negative returns for US 10-year government bonds would be an unprecedented event.
But there's a first time for everything, as the old saying goes, and if the current round of default brinksmanship in D.C. doesn't result in a paradoxical safe haven bid for
Yields will follow inflation. If inflation continues to unwind and the economy continues to slow down that is the big picture. After inflation bottoms then its anyone’s guess. My guess is continued slow nominal growth and weak demographics keep rates on the low side.
Yes, that’s the current market consensus, what everyone and their mother expects. Hence the word “contrarian” in the headline.
We’re now 10+ years into the Baby Boom generation turning 65. The pandemic certainly nudged this along, but this cohort will continue to voluntarily or forcibly enter retirement in outsized numbers. What previously would have shown up in the unemployment number will instead present as a smaller work force (so official unemployment stats may not rise to panic levels in an economic slowdown). This will both keep upward pressure on wage growth and inflation (as retired people will continue to consume and will require incrementally more services, but are otherwise less economically productive through less work). This too is likely to put upward pressure on bond yields.