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July 16, 2023 | 5.5% Rate on T-Bonds Coming, but Then What?

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

Jim Grant, the financial word’s adult in the room, says the bear market in Treasury bonds could last for decades. Do the long-term charts bear him out? The one reproduced above suggests that it’s at least possible that we are in the early stages of such a move. Most immediately, the chart projects a further rise in 10-year rates to at least 5.5% over the next 2-3 years, a 45% leap from the current 3.9%. If this were to occur, it means the deflationary bust I have long predicted will have to wait. That’s because rates that high could not possibly co-exist for long with falling asset values.

Think back to the real estate crash of 2007-09, when home prices across the U.S. plummeted by more than 10% per year.  This subjected property owners with 5% mortgages to crushing real rates exceeding 15%. If credit stimulus had not bailed them out and stabilized property values starting in 2009, millions of homeowners would have been pushed into bankruptcy.

All Bets Are Off

This will happen eventually when deflation ‘cancels’ public and private debts that long ago became too large to repay. For now, however, inflation will continue to rule if nominal rates are in fact headed to the 5.5% ‘Hidden Pivot’ target shown in the chart. Thereafter, all bets are off, since nominal rates could fall below 2% and still be asphyxiatingly high in real terms. The corresponding rise in the price of Treasury paper would bring about a bull market in T-bonds. That’s not what Jim Grant envisions, although the outcome, a U.S. and global economy reduced to ruin, is congruent with things he has been writing about for decades.

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July 16th, 2023

Posted In: Rick's Picks

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