U.S. economy at risk of seeing higher rates, warns NewEdge's Ben Emons
Time those weekly jobless claims coming at the highest level since last August raising hope the Fed may start cutting rates at some point this year. But our next guest isn’t too convinced. He still sees the 10 year climbing back over 5%. Ben Emmons is a senior portfolio manager and Head of Fixed Income at New Edge Wealth. Ben, great to have you with us. What are the factors that will drive us above 5% at at this point? It seems like we found like a nice little range here in the 4, 1/2% range or so. That’s what it looks like, Melissa. But you know I was again watching Japan and we’ve talked about on the show before the latest there is that the Bank of Japan is now really openly out saying we may have to move faster and sooner than we thought before because they’re looking at the yen that continues to struggle and the connection there obviously between the 10 and the yen is pretty strong. But I think it’s really the Japanese bond market that’s now going to play here because that’s inching towards 1% of the 10 year yield. That’s sort of a psychological barrier, right. If you think about it, just like in our market when we went to 4%, now close to 5%. So we have to really watch this because as much as that’s the market controlled by the BOJ as they say that can just as much move as fast as as treasuries, there’s really little liquidity. So I think it’s going to be really interesting from here how Bank of Japan is going to manage interest rates with the yen. It’s going to affect our rate. So if the BOJ does make a move, it would seem to me that that would be a permanent move. And so a permanent move meaning they’ll stay at that level, higher levels, right. And so therefore the 10 year yield would stay at higher levels. So do you think that this is a sustained move above, above 5% because of this or is this just a pop above because markets have been able to deal with a pop above here and there, but if it’s sustained, that’s a little bit of a different story. Now I think it’s a good point because if the link is there that Japanese interest rates go higher and the correlation of US rates is there, then that sustained move as you talked about would be a completely different world. Now we got to put in context of what 5% yields in US would do. As we talked before it, it would likely put more pressure on the US economy, right. And and that would lead to people discounting that there would be rate had cuts coming at some point down the line. But I do think that in the in the global rate spaces it’s being traded that Japanese government bonds have never really played a good role driving other interest rates. That’s changing now. So you could have a let’s say period of of the 10 year hitting 5% or higher and stay there never going to keep debating it’s right. I think there’s this risk that we’re going to go higher and Rich and I want to say I agree with you, the rates are going higher. I want to put that out there. The flip side of the coin is though GDP came in very disappointing. The data that’s been coming out of the last couple of months has been soft. That would suggest rates should go lower. So you have this tug of war going on and you’re suggesting it’s going to be won by the supply side of things, right, The supply demand side of the equation and probably throw some inflation in there and that’s why your yield’s going higher. But is there a chance that obviously the economic side wins out and rates go down? There is, but I would I’m more on the side what you’re saying like it’s the supply side that’s driving it, whether it’s the issuance or whether it’s the supply side of the economy because it seems that higher rates have not really impacted that. And as I think really function of we continue to put a lot of money in the economy every day and I’m on this like in inflation reduction act and infrastructure act tracker so to speak every day I see emails from all kinds of projects across the country. I think it’s driving productivity higher and that’s I think part of the push behind rates that makes it hard for them to go sustainably down. I mean the other part of that is that we have no real downside pressure yet and inflation we’re kind of stuck where we are good develop, but I think it’s not likely in an economy like this until we get really moved down of headline fish below 2% that I could see rates lower. So I think it’s struggling here for the treasury market to make real gains. Why the low end of the curve I think will stay, continue to stay on the pressure. The global central bank experiment began in Japan decades ago, right. So now they’re right in the middle of it. Again to guys point, if the 10 year yield starts to move in the US based upon supply and demand versus inflation expectations, I don’t think a lot of people are in that camp. So if we start to go north of 5%, while inflation may be coming in, it may get people little exercise as Guy likes to say. And what do we do at that moment you think, I mean we’re already backing away from QT here. I guess we could blow her completely and who knows, maybe someday go to QE. But what’s the tipping point here that gets people to think about the deficit and the debt levels in the US and what that means higher rates? Yeah, I mean that point, Danny’s Ralph, that the real tipping point is the interest rate level in itself relative where GDP is, right? If we’re getting interest rates three 4% above GDP, people start calculating how the debt to GDP level is going to balloon and that’s going to be even higher rates. That’s what Europe experienced like about 10 years ago. It’s hard to pinpoint the exact level of rates because who knows. But I do think that you, you have to make a fairpoint here that this is another aspect of the supply side. We can’t ignore the deficit. We know that nothing is happening on the deficit front. Neither president is making any kind of statement about it or do do anything perhaps about it. So the market is going to have to discount a risk premium. My estimate is and there’s some studies on this too, it’s at least 30 basis points in the 10 year that’s that seems to be the case. That seems small, but that’s incremental, right. So talk about sustained, you take 30 base points at the top of the ten year and you get a little data surprise we’re above 5% and the calculus changes. So it’s a real risk, this deficit problem.