REUTERS/Brendan McDermid
- There's nothing stopping bond yields from continuing to rise, according to forecaster Jim Bianco.
- Bianco made the case that the Treasury yield curve looks on track to completely de-invert.
- That's partly because the Fed has vowed to keep interest rates higher-for-longer.
There's nothing stopping the 10-year Treasury yield from continuing to surge past 5%, as the yield curve looks poised to completely de-invert, according to market forecaster Jim Bianco.
The Wall Street veteran and Bianco Research president pointed to the recent spike in bond yields, with the yield on the 10-year US Treasury notching 5% on Monday, the first time it's breached that threshold since 2007.
Bond yields have since eased, with the 10-year trading around 4.85% on Tuesday. But it's likely to see another surge as interest rate fears across the market persist, Bianco said.
"If we're going to completely un-invert the yield curve, and I think we're destined to do that, or somewhere along those lines, then it's going to go to at least 5.5%," Bianco said of the 10-year yield in an interview with CNBC.
The yield on the 2-year note has surpassed that of the 10-year Treasury bond for over a year -- a classic recession signal that flashes when investors think a downturn is on the horizon in the medium-term.
A de-inversion of the curve would mean investors are shifting their expectations to think that long-term rates will remain higher. That's largely because the Fed has vowed to keep interest rates in the economy elevated as it remains hawkish on inflation.
Investors are now pricing in a 98% chance that rates will stay above 4% by the end of 2024, according to the CME FedWatch tool, which could influence bond yields to remain elevated as well.
Some commentators have made the case for rate cuts in 2024, as higher interest rates threaten to overtighten the economy into a recession. But rates actually haven't been restrictive enough to "hurt the economy," Bianco said, with a handful of indicators that point to still-robust economic activity. GDP is expected to have jumped 5.4% over the past quarter, according to Atlanta Fed economists. Meanwhile, the labor market also remains hot, with the economy adding a blowout 336,000 jobs the last quarter.
"We're not really punishing the economy. That's why I think markets have room for rates to move higher," Bianco said.
Long-term yields could also be pushed up as the US looks to issue more long-term Treasury notes, Bianco added. Meanwhile, the Bank of Japan, the largest foreign holder of US Treasurys in the world, is likely to trim its holdings as it looks to potentially tighten monetary policy, which would also potentially push yields higher.
Despite the resilience seen so far in the US, some experts have noted that the 2-10 Treasury yield curve typically de-inverts in the months leading up to a recession, meaning that a recession could be close at hand.