‘This bond market is so radically oversold’: economist David Rosenberg

Economist David Rosenberg said he made his career by not following the herd and his bond forecast could be seen as the latest example.

According to the President of Rosenberg Research, this year’s interest rate shock in connection with the 10-year benchmark Treasury note is only temporary.

“This bond market is so radically oversold,” Rosenberg told CNBC’s “Trading Nation” on Friday. “We’ll peel back to 1%.”

The 10 year return ended the week at 1.41%. It’s now up 55% this year and is around 52-week highs. The rate of return moves inversely to debt prices.

The overwhelming fear on Wall Street is that the jump was due to inflation rather than a temporary surge in demand tied to the economic recovery.

“The problem I have with this view is that all of these impulses are temporary and will fall off next year as we face the proverbial fiscal cliff,” Rosenberg wrote in a recent note.

However, Rosenberg does not completely rule out a run on 2%.

“That would be a big technical overshoot,” he said. “A 2% move in the 10 year note I’ll tell you is 3% plus at the end of 2018. It’s something you want to buy.”

Although he expects inflation volatility to ease, he still sees problems for the stock market. Rosenberg, who served as Merrill Lynch’s Top North American Economist from 2002 to 2009, is known for his bearish claims.

Currently, Rosenberg is negative on big tech and mega-cap growth stocks. However, he does not see rising rates as the main reason the tech-heavy Nasdaq, which fell 5% last week, came under pressure.

“The reality is that most of them have actually peaked and started rolling just under the weight of their own overrated excess a few months ago,” Rosenberg said.

Rosenberg’s watch list

The market groups on his watch list are automobiles and residential property as pent-up demand was dragged forward dramatically during the coronavirus pandemic.

Rosenberg fears that there will ultimately be an oversupply in the housing sector on the labor market. He predicts that this will stifle wage growth, which will prevent inflation from accelerating.

Rosenberg warns that the impact would mean affordability issues with the property price to income ratio near the 2006 bubble levels.

“We could end up seeing stocks and property prices drop by at least 15%, which is more important,” said Rosenberg. “That would be a pretty significant negative shock to wealth and create what we called the negative wealth effect on spending.”

It is a scenario that he believes is entirely possible and that would push inflation fluctuations into the background.

“We will no longer hear the bond bears talking about inflation,” said Rosenberg.

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