All Roads Lead to Higher Long-End Yields | Markets in 3 Minutes

We've talked a lot about bond markets and why we're seeing the higher yield story being factored in. I'll linger there, unapologetically, because it does seem to be something of an obsession. We spoke earlier to Althea Spinoza. He was saying she sees higher yields on a Trump presidency. She says she sees a slightly lower yield in the short term, but then eventually a higher yield under Harris. So all roads lead to higher yields, do they? I think that's probably the case. Yes, indeed. I think, first of all, you know that I've been in the camp all year that we've been over-aggressive in pricing Fed cuts, that the level of Fed cuts that were priced, and are still priced, implies an economy that is going off a cliff and into a recession or a crisis. And there's no sign of that just yet. So therefore, I think we're going to continue to price out rate cuts. So that's one dynamic. And I think the other one is both presidential candidates plan to continue to expand the fiscal deficit. So that's going to continue to put upward pressure and yield to the long end. And I think that will add into the term premium. Plus, I think the final dynamic is inflation will remain sticky. I think the Boeing strike story reflects that sticky components of inflation. These are workers who are rejecting a 35% wage increase over four years, not because a company is doing so well, it's hemorrhaging cash at the moment, but because they cannot cope with the cost of living increase in the last few years. And despite the fact that oil prices are contained, we are seeing commodity prices more generally head higher all the time. Inflation is still with us. At some point, stocks are going to have to react to this. Is there a line in the sand, let's call it 5%, where the stock market starts to react to the bond market story? No, there's not a line in the sand. You're absolutely right. There's a point this will react. And I think that's what ultimately breaks the stock market. But at the moment, the stock market is saying, hey, this is no problem at all. The key things to look at there, you know, earnings, first of all, earnings are perfectly fine, continue to grow. I think the other part is the consumer, when the consumer gets sufficiently squeezed, and the consumer is not yet rolling over yet. So I don't know what the level is, and I think it's crazy to pick at levels that are so far away. And I also think there's a duration of higher yields that can matter over time, because it is a slight squeezing over time. So I don't know what the level is, but I think it could be potentially significantly higher, and that will break the stock market at some point. Mark, do you trade the deficit in any way, or is that a problem for next year? I think the deficit is going to be an increasingly story to trade over the longer term. You can't trade it over the short term, and I don't think we're close to a Liz Truss type moment in the U.S. But I do think that the deficit will continue to add to a growing term premium in the U.S. curve. Ultimately, the way you play this is through a steepener, because it's not going to be a steady move higher and higher yields, because there's going to be bouts of, like, risk aversion, which will see a knee-jerk reaction of yields lower. But I think the curve will continue to steepen significantly over the coming years. I think we'll see 2s, 10s go to 100 basis points or higher in terms of that spread.