In this sneak peak from the Action Alerts PLUS investing club, team member and technical analyst Bob Lang explains the key clues the bond market holds about the Federal Reserve, markets and more.
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FULL VIDEO TRANSCRIPT BELOW:
J.D. DURKIN: We've heard lots of different pundits throw around buzzwords around bonds as of late. Can you simplify all of this for us, Bob? What does the recent trading tell you, and why should the average member of the portfolio at home care about what they're seeing in that particular yield movement?
BOB LANG: Well, when yields rise, J.D. , it means borrowing costs are much more expensive, and it costs more money to buy a house, to get a loan. Credit card interest rates are higher, and the whole-- your bond holdings, if there's a lot of investors who have long term bond holdings, those prices are going down. Because when yields-- remember, yields and prices move in the opposite direction.
I think not only-- when you talk about bonds, J.D. , not only is the Fed selling bonds, they're selling them at a very rapid rate now, close to $100 billion a month. They're selling them off their balance sheet, but also we're seeing that the Chinese have also been selling bonds at a slower clip over the past couple of years. Their balance sheet of US treasuries has been reduced drastically, and you have to figure out-- try to figure out who is going to take these fixed income instruments off their hands.
I just don't see it happening. And that's-- which is the demand for those bonds is low. You see yields starting to rise. We could certainly see 6% on the 10 year anytime soon. Don't forget we have another car wreck potential coming up with the government-- potential government shutdown in a few weeks. And of course, if that gets resolved, we could see the markets starting to rise.
But like last time they just put a Band-Aid over it. And then we, of course, have new leadership in Congress this week, which may not be willing to play ball with President Biden. If the government shuts down or the circus continues, we are likely to get a downgrade of our debt, and rates will certainly climb on that news. So interestingly enough, treasuries at 5% to 6%, interestingly enough, are much more attractive for a yield than say the Russell 2000, which is down 6% in 2023.
J.D. DURKIN: Do you see-- I mean, some have said they might see that 10 year even going north of 10%. Is that anything that you foresee happening or you are concerned about, Bob?
BOB LANG: If the Fed does not rein in inflation, anything is on the table, and I mean anything. I mean a double digit inflation we've had last year, it just continues to go on. We need to see negative readings now. With the work that the Fed has done for the past year and a half, it's slowly growing into-- it's dripping down into the economy.
But it's not having an effect on inflation yet. So I think the Fed has to shift into another gear here and start saying, look, we've got to be a little bit more serious, a little bit more onerous on interest rates and push them up to levels that can certainly separate the economy from inflation.
