Let’s not belabor the title of this blog post. Here are three reasons bonds might be in trouble this year or next.
1 – Borrowing. The recently passed tax bill is actually pretty simple – individuals and corporations pay less in taxes today and we take on additional debt to pay for it. The US Treasury is borrowing about $1 trillion dollars this year, an 84% increase from last year. All things being equal, additional borrowing (for any entity) should require higher yields. In other words, if you are a heavy borrower – your lenders expect a bigger payoff. Yields go up, and prices on current bonds go down.
2 – Global economic growth. The US economy is moving along at a fine clip, but so is the international growth story. When growth is presumed to be high, more currency flows to those growing assets. When less money flows to staid US bonds, yields have to move up to compensate potential lenders. Yields go up, and prices on current bonds go down.
3 – Inflation. The US employment picture is about as tight as it can get. Another percentage point or so can be taken out of the total, but not much more than that given frictional unemployment. If a tight labor market starts making employers pay more, that’s good for the workers but also a primary cause of price inflation. The Federal Reserve has been making modest, intermittent increases to rates lately but they may have to speed up rate-hikes if inflation starts ticking up appreciably. Yields go up, and prices on current bonds go down.