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

Economist David Rosenberg says he’s made a career out of not following the herd, and his bond forecast could be seen as the latest example.

According to the chairman of Rosenberg Research, this year’s rate-yield shock around the benchmark 10-year Treasury bill is temporary.

“This bond market is so drastically oversold,” Rosenberg told CNBC’s “Trading Nation” on Friday. “We’re going to go back to 1%.”

The 10-year yield ended the week at 1.41%. It is now up 55% so far this year and is around 52 week highs. The yield evolves inversely with the prices of the debt.

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

“The problem I have with this view is that all of these incentives are temporary in nature and will unfold next year when we face the proverbial tax cliff,” Rosenberg wrote in a recent memo.

Yet Rosenberg doesn’t completely rule out a 2% race.

“It would be a huge technical overtake,” he said. “A 2% move in the 10-year note, I’ll tell you, would equate to 3% more at the end of 2018. It’s something you want to buy.”

Even though he expects the inflation nervousness to subside, he still sees problems for the stock market. Rosenberg, who was Merrill Lynch’s senior North American economist from 2002 to 2009, is known for his bearish calls.

Right now, Rosenberg is negative on big tech and mega-cap growth stocks. However, he doesn’t see the rate hike as the main reason the Nasdaq, which fell 5% last week, came under pressure.

“The reality is that most of them peaked and started riding several months ago just under the weight of their own overrated excess,” Rosenberg said.

The market groups on its watch list are automobiles and housing, as pent-up demand during the coronavirus pandemic has advanced significantly.

In the case of housing, Rosenberg fears that it may ultimately be hit by an oversupply in the labor market. He predicts that it will suppress wage growth, which will prevent inflation from accelerating.

Rosenberg warns that the impact would lead to accessibility issues with house price-to-income ratios close to 2006 bubble levels.

“We could end up with at least a 15% drop in stock and house prices, which is even more important,” Rosenberg noted. “It would be a pretty big negative shock to assets and create what we used to call the negative wealth effect on spending.”

It is a scenario which he describes as entirely possible and which would put the nervousness of inflation on the back burner.

“We won’t hear bond bears talking for long about inflation,” Rosenberg said.

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