The Hoisington Capital duo remind that markets - as they initially did in 2009 - have quickly priced in sizable positive effects from a mammoth fiscal stimulus package.
The rush to judgement then was wrong, and may be so today as well. The mistake then (and now?): To assume the economy is "an understandable and controllable machine rather than a complex, adaptive system."
There is, they say, an underestimation of the negative impact of delayed implementation and other lags, not to mention the risk of unintended consequences.
There's also monetary policy, and if that continues to tighten, it could offset any effect from fiscal actions.
They expect GDP growth of just 2% this year, and a 30-year Treasury yield trending toward that low figure (vs. 3% currently).
The 10-year U.S. Treasury yield is up a mere three basis points to 2.505%, but double-digit yield advances are taking place all across Western Europe, including Germany, where the 10-year Bund yield is higher by 10.2 bps to 0.286%.
Released just over 30 minutes ago, the U.S. ISM manufacturing report didn't disappoint the economy bulls. The headline gauge of 54.7 rose from November and topped estimates. Both the New Orders and Production sub-indexes jumped above 60, as did Prices Paid.
SocGen suspects investors have not forgotten about a powerful bond rally in each January of the past three years, each with its own rationale ("the 2H13 taper tantrum was reversed as the economy started to run out of steam; early 2015 saw the front running of the ECB’s QE; early 2016 saw a panic reaction to large capital outflows in China").
Still, firm says it does not expect a repeat:
The macro environment differs sharply. Global growth peaked in autumn 2013, and from there slowed down consistently into mid-2016. But it has now turned. Global inflation has also picked up, with U.S. wages, oil prices and the Chinese PPI all pointing north. Economic momentum into the turn of the year, especially in the DM world, is such that the global economy is likely to prove more resilient to shocks.
"The cyclical improvement, along with the ongoing reflation effort (U.S. fiscal stimulus in the pipe, ECB, BoE and BoJ remain very accommodative) will push market participants to reduce unprecedented exposure to the interest rate risk.
Japan has overtaken China as the biggest holder of U.S. government bonds, as figures for foreign ownership of U.S. Treasurys in October show that China's holdings declined to the lowest in more than six years as its central bank used its foreign exchange reserves to support the yuan.
Japan's Treasury holdings also decreased but at a slower pace; Japan trimmed $4.5B of U.S. paper to end the month with $1.131T, while China's holdings plunged by $41.3B to $1.115T, the lowest level since July 2010 and capping a decline of five straight months.
China has been dipping into its reserves, selling Treasurys to support the yuan, which yesterday fell to its weakest level vs. the U.S. dollar in more than eight years.
Foreigners in general are dumping U.S. debt at a record pace, selling off $304B over the last seven months; October's outflows totaled $63.5B and followed record foreign selling of $76.6B in September.
Surprising no one with a 25 basis points rate hike this afternoon, the "dots" will make some noise as they show the median Fed Funds rate for the end of next to be 1.4% - or roughly three 25 basis point rate hikes. That's up from just two anticipated three months ago.
The most hawkish of the dots expects a Fed Funds rate of 2.125% to end 2017, and the most dovish 0.875%.
GDP projections are marginally higher, UE rate projections marginally lower, and core PCE inflation projections the same (1.8% in 2017, 2% in 2018 and 2019).
Bond yields have moved up since the news hit, with the 10-year Treasury now up 1.6 basis points to 2.49%.
According to JPMorgan's weekly survey, about 60% of active clients have net short positions in Treasurys. That's up from roughly 20% a few weeks back. It's also the highest level of net shorts in more than two years.
The FOMC begins its two-day meeting today, the end of which will almost certainly see a 25 basis point rate hike.
The 10-year Treasury yield is flat today at 2.472%.
The yield on the 10-year Treasury note is above 2.5% for the first time since October 2014, as investors eye a key Federal Reserve meeting which begins tomorrow. The next notable yield is 3%, last hit in 2013.
Meanwhile, U.S. stocks are at all-time highs, with the Dow in striking distance of 20,000, but futures are sliding lower to start the week.
Will expectations of a Fed rate hike put a dent in the Trump rally?
Trades that performed best in the three weeks since Donald Trump's election victory are taking a breather, with the dollar and U.S. bond yields falling from recent peaks and equity index futures signaling stocks will slip from all-time highs.
The dollar could face further resistance in the week ahead given potentially risk-laden events such as the midweek OPEC meeting and Italy's Dec. 4 referendum on constitutional reforms.
Consistently bullish (and right) on fixed-income for as long as anyone can remember, Van Hoisington isn't buying the conventional wisdom that the election results mean the economy and inflation are set for a demand shock in the form of lower taxes, less regulation, and more deficit spending.
His view of the trajectory of the economy (sluggish) over the next four to six quarters is unchanged.
For tax cuts to make a positive contribution, monetary policy must "remain favorable, not adversarial," and the Fed is about to hike rates, he says. The Reagan tax cuts, he reminds, were far larger than what's being discussed, and occurred as interest rates were declining sharply.
Hoisington: "Markets have a pronounced tendency to rush to judgment when policy changes occur,” and were proven wrong about potential for 2009 stimulus and QE1 to ignite inflation.
The president-elect's pro-business agenda is inherently "unfriendly" to bonds, Jeff Gundlach tells Barron's, as it will lead to stronger economic growth and renewed inflation.
Look for Trump to "amp up the deficit" to pay for infrastructure and other programs - producing an inflation rate of 3% and nominal GDP growth of 4-6%. Given that, there's no way the 10-year Treasury yield stays near its current level of 2.15%, and it could rise as high as 6% in the next four or five years. [Serious question: How does "amp up the deficit" differ in any way from what was done in 2009? Can anyone say "shovel-ready"?]
For now, Gundlach (DFLEX, DBLFX, DBL) remains a fan of TIPS (NYSEARCA:TIP), and has swapped a good deal of his government paper for those inflation-protected securities.