Bond market holds serious clues about what's next for stocks

Here's what a look at the 10-year treasury yield can tell you about what's in store for Wall Street.

Transcript

00:00 We've heard lots of different pundits throw around buzzwords around bonds as of late.

00:04 Can you simplify all this for us, Bob?

00:06 What does the recent trading tell you and why should the average member of the portfolio

00:10 at home care about what they're seeing in that particular yield movement?

00:15 Well, when yields rise, J.D., it means that borrowing costs are much more expensive and

00:21 it costs more money to buy a house, to get a loan.

00:26 Credit card interest rates are higher and your bond holdings, there's a lot of investors

00:33 who have long-term bond holdings, those prices are going down because when yields, remember

00:38 yields and prices move in the opposite direction.

00:42 I think not only, when you talk about bonds, J.D., not only is the Fed selling bonds, they're

00:48 selling them at a very rapid rate now, close to $100 billion a month.

00:54 So they're selling them off their balance sheet, but also we're seeing that the Chinese

00:57 have also been selling bonds at a slower clip over the past couple of years.

01:03 Their balance sheet of U.S. treasuries has been reduced drastically and you have to figure

01:08 out, try to figure out who is going to take these fixed income instruments off their hands.

01:15 I just don't see it happening, which is the demand for those bonds is low.

01:21 You see yields starting to rise.

01:23 You could certainly see 6% on the 10-year any time soon.

01:26 Don't forget we have another car wreck potential coming up with the government, potential government

01:31 shutdown in a few weeks.

01:32 And of course, if that gets resolved, we can see the markets starting to rise.

01:35 But like last time, they just put a Band-Aid over it.

01:39 And then we of course have new leadership in Congress this week, which may not be willing

01:43 to play ball with President Biden.

01:45 If the government shuts down or the circus continues, we are likely to get a downgrade

01:50 of our debt and rates will certainly climb on that.

01:53 So interestingly enough, you know, treasuries at 5 to 6%, interestingly enough, are much

01:59 more attractive for a yield than say the Russell 2000, which is down 6% 2023.

02:07 Do you see, I mean, some have said they might see that 10-year even going north of 10%.

02:12 Is that anything that you foresee happening or you are concerned about, Bob?

02:17 If the Fed does not rein in inflation, anything is on the table.

02:23 And I mean anything.

02:25 I mean, double-digit inflation we've had last year, it just continues to go on.

02:30 We need to see negative readings now.

02:33 With the work that the Fed has done for the past year and a half, it's slowly going into

02:38 the dripping down into the economy.

02:40 But it's not having an effect on inflation yet.

02:42 So I think that the Fed has to shift into another gear here and start saying, look,

02:47 we've got to be a little bit more serious, a little bit more onerous on interest rates,

02:53 and push them up to levels that can certainly separate the economy from inflation.

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