According to Wall Street analyst Jim Bianco, Treasury yields are expected to witness a significant surge in the coming weeks, possibly overshooting 5%.
“I don’t believe we have reached the end of this bond market movement,” said Bianco Research president in an interview on CNBC’s “Fast Money” show.
Provided the Federal Reserve hints at halting interest rate hikes while inflation remains a concern for investors, Bianco warns that bond purchases may decline.
“This is what I believe has been harming the bond market,” he stated. “The more the Fed discusses being done, waiting, and evaluating all their rate hikes, the worse they make the situation.”
The yields on 5-year and 10-year Treasury notes, as well as the 30-year Treasury bond, have reached their highest levels since 2007. On Tuesday, the 10-year Treasury yield reached 4.8%. Bianco considers 4.5% as the fair value.
“We are slightly above the fair value at the moment. The bond market appears to be in a state of capitulation,” noted Bianco. “Throughout the year, bond investors and managers have held long positions, attempting to argue the case for a recession and a potential rally. However, they have consistently been proven wrong and are now capitulating.”
The volatility in the bond market is also impacting stocks. The Dow Jones Industrial Average suffered its worst daily performance since March and is now in negative territory for the year. The S&P 500 and the Nasdaq Composite also recorded a decline of more than 1%.
The recent concerns about surging yields follow a warning issued by CNBC on-air editor Rick Santelli during the “Fast Money” show.
“There is significant potential for upward movement,” said Santelli on Monday. “If I had to make a worst-case estimate for Treasury rates over the next seven years, I would say around 13.5% to 14%.”
Bianco views yields at that level as an extreme scenario. “13%? That would require a major crisis to occur, far worse than what I anticipate,” he added.
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