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Bond Market Signals

November 5, 2021

What signals are we seeing from the bond market, and how do they tie into our economic forecast for 2022? Catch our newest TrendsTalk episode with ITR CEO and Chief Economist Brian Beaulieu to learn more.


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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, I'm Brian Beaulieu, CEO, Chief Economist of ITR Economics. And, thank you for joining me for this edition of TrendsTalk. I Want to talk about what's going on with the bond market, there's some very good favorable signals coming out of there that tie in with our forecast for 2022 of slowing growth, the operative word there being growth just won't be as fast as next year. And some people are asking us "might this slow down in growth turn into overt recession, more of a trouble spot for the economy". And in this month's executive summary, you will read a multitude of reasons why we don't think that is true. And one of the reasons I cite in the executive summary is the bond market, but I really don't go on to explain that very well or at all, so I thought I would do that with the Trends Talk.

The bond market is still holding the US government 10 year bond yield very low, for the month it was at 1.6% last month, the just one decimal place yesterday, it was at 1.58% still exceptionally low. And the takeaway from that is the bond market is telling you, me, they're not worried about near-term inflation. So they see the federal reserve as being correct that this is transient, that the more problematic inflation is probably 18 months or further away, because that's how far out the bond market can look with a reasonable degree of [inaudible 00:01:46] is 18 months. And at 1.58% the bond market is also telling us that they're not yet concerned about all this deficit spending that the government is engaged in. One thing I've learned a long time ago is if the bond market is cool, then why go looking for trouble?

Another factor is the yield curve, which ties in with the bond market, obviously, but we're looking at a favorable yield curve right now. It's the way it's supposed to be with long term rates running elevated to short term rates. When that flips around and we get an inverted yield curve we know we're in for a problem like we had before the 2000, 2001 downturn like we had before the great recession. And what we saw a whisker of in terms of in late 2019, that tied into what we had been forecasting would be a one quarter decline in GDP back in 2018 and 2019, that was the forecast. Right now, the yield curve, very favorable for the growth rate of the United States, staying positive. That's good, we're getting thumbs up from the bond market, which is more important than the stock market, so we continue to warn you.

The stock market may be throwing off some additional beta volatility, don't get too wrapped up in that. It's fundamentally overvalued and you're bound to see some of that chatter. It's built into our outlook of slowing growth in the US economy, slowing recovery in economies, such as Japan and Europe in general. That doesn't mean there aren't some worrying facets around the edges like China. Also not thrilled with how disposable personal income sank a little bit with the latest data, but the current employment numbers support the bond markets view that we're okay. So we're staying the course with our outlook, we are okay, we're growing. You're going to stay very, very busy going forward, you're going to need more labor, you're going to need more working capital, you're going to need more time. You're going to need more energy. That's the takeaway from what the bond market is telling us today. I'm Brian Beaulieu. Thank you for joining us for this edition of TrendsTalk.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.