It’s worth noting that a 2.5% yield on 10-year Treasurys would still rank in the lowest decile over the last 70 years, Weisman continues. But a historically modest rise in 10-year Treasury yields to 2.5% from 1.3%, where they stood in mid-August, would sock investors with an 8% or 9% loss.
If one goes back 18 months to February 2020 before the outbreak of the pandemic, the economy is running a lot “hotter than it was then,” Weisman continues. Given the amount of stimulus and liquidity in the system, that’s likely to continue for the next year, barring the outbreak of a nasty, new variant.
If the market turns out to be right, what developments could it be pricing in? One possibility is a quick economic slowdown, Cuggino says. If Covid keeps mutating, that could happen.
There are several other possibilities in Weisman’s view. Perhaps the market is reasoning that the Fed will have to raise rates and “things will peter out” and the economy will enter a recession in 2024 or 2025.
There’s another, possibly much more robust scenario, one Weisman doesn’t mention: one in which the forces of technology and globalization—the things that caused disinflation for the last three decades—will reassert themselves and trump shortages in the labor and commodity markets.
But there are other ramifications if current market conditions remain. Specifically, Weisman says, if negative real rates become a permanent fixture on the financial landscape, allocating capital will become a daunting challenge.