Jim Grant and Jim Bianco discuss the bear market in bonds which began in 2020. Mr. Bianco’s conviction is a 5.5% 10-Year in 2024. Could a Lis Truss moment hit the U.S. whereby bond markets enforce fiscal discipline that government themselves will not?
Mr. Bianco reiterates the prior 13 years of interest rates were anomalous to which Mr. Grant adds that 5-6% is about the nation’s long run average. Interest rates still haven’t gone high enough to “murder” anything – they will, just not yet. The S&P is still up about 18% this year but only 2-3% net the Magnificent Seven.
They are still interested in the repercussions of unrealized losses on bank balance sheets. Mr. Bianco agrees that this could be an economic “murder” weapon. We are still experiencing the bank walk, and smaller borrowers should feel more of a pinch, as they need to operate with more elusive bank loans vs. having access to the bond market.
We’ve only had two prior bond bear markets since the 21st century: 1900-1920 and 1946-1981. However, this was the fastest rise in interest rates – 5% within 18 months.
The final discussion was whether the financial markets will impose the fiscal discipline on government spending that governments themselves will not. For example, in Britain, Gilts went up by 150 bps within 8 days with a mini budget of cutting taxes and higher spending. That ended the budget and Prime Minister Liz Truss’s tenure.