This bond expert who called the spike in U.S. yields forecasts the 10-year to reach 4%

Scott Peng, the founder and chief investment officer of New York Advocate Capital Management, has faced the collapse of the bond market.

In January 2021, Citi’s former interest rate strategist forecast 10-year US Treasury yield TMUBMUSD 10Y,
to reach 2.5% in 12 months; it took about 15 months to get there. Most recently, he said in December that interest rate-sensitive asset classes would have problems, identifying NDX technology stocks,
JNK high performance bonds,
emerging markets and real estate, all of them with a sharp fall.

So the big question from here is whether the pain of the bond market will continue or not. Peng says he will do so, predicting that the 10-year yield will reach 4% by the end of this year and 5% by the end of 2023. The 10-year yield was 3.11%, about half an hour after the latest US Employment Report that approached market expectations.

Peng notes that Federal Reserve Chairman Jerome Powell made an interesting comment during Wednesday’s press conference that Fed tools do not work on supply shocks but on demand shocks. “They may require considerably more increases than the market has experienced in recent years before the Fed can anticipate this supply-side inflation-driven inflation attack,” Peng says.

The shock of consumer demand accumulated after the pandemic, he adds, has already dissipated. At the same time, China is no longer a source of relief from supply, both as the country moves to more value-added services and its decision to pursue a zero COVID policy that has exacerbated the problems of the supply chain. China’s aging population means the world’s second-largest economy is facing a growing wave of labor shortages and wage inflation, he added.

Peng says the Fed’s funding rate should be at least 1.5 percent above the basic measure of the US personal consumption expenditure (PCE) inflation index, which was 5, 2% year-on-year in March. He said the current market consensus is only for what he calls a “dream” scenario, implying that the core PCE will run at 2% by the end of 2023.

The most likely scenarios would be inflation between 3% and 4%, or possibly 5%, which would mean that the terminal rate would be between 4.5% and 8%. In a “time for the new Fed chair” scenario, the terminal rate could even have to go up to 9%.

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