Bond market doesn't like new Japanese PM use of fiscal stimulus: National Alliance's Andy Brenner

Key Concepts

• Japanese 30-year bond yield: A benchmark long-term interest rate in Japan, reflecting market expectations for future economic conditions and inflation.
• Fiscal stimulus: Government policies (e.g., increased spending, tax cuts) aimed at boosting economic activity.
• Duration (bond market): A measure of a bond's price sensitivity to changes in interest rates; bonds with longer durations are more sensitive to interest rate fluctuations.
• Yield curve: A graphical representation plotting the interest rates (yields) of bonds with equal credit quality but differing maturity dates.
• 2s10s (2-year vs 10-year yield spread): The difference in yield between 2-year and 10-year Treasury bonds, often used as an indicator of economic expectations.
• 5s30s (5-year vs 30-year yield spread): The difference in yield between 5-year and 30-year Treasury bonds.
• Government shutdown: A situation where non-essential government operations cease due to a lapse in appropriations.
• Jobless economy: An economic scenario where GDP growth occurs without a corresponding increase in employment.
• ADP number: A private-sector report on US employment, often released before the official government jobs report.
• AI's impact on employment: The potential for artificial intelligence to automate tasks, influencing hiring decisions and workforce needs.
• Investment-grade corporates: Bonds issued by companies with high credit ratings, indicating a relatively low risk of default.

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Global Market Implications of Japan's Bond Movements

Andy Brenner, Head of International Fixed Income at National Alliance, argues that the recent surge in Japan's 30-year bond yield is indicative of a "larger story about global markets," rather than merely a domestic political issue. He notes that the new Japanese Prime Minister's inclination towards "fiscal stimulus" was poorly received by the bond market. Overnight, the Japanese 30-year bond yield "back up 14 basis points," reaching levels not seen "since 1999." Brenner believes this trend will negatively impact "the long end of the bond market globally," citing similar movements observed "a little bit in Europe" and "a little bit here in the US."

He directly refutes a recent Bloomberg story suggesting it's "the time to buy duration," stating, "I don't think that's the case. And it's they've already been proven wrong for the first day. And I think it's going to be proven wrong again." Brenner supports his view by highlighting the resilience of the US economy, which, despite potentially being a "jobless economy," is "still booming." Consequently, he sees "no reason to want to buy duration here" and anticipates "another 25 basis points higher in yield and longer rates" across both 10-year and 30-year US Treasury bonds.

Bond Spectrum Strategy and Fed Policy Outlook

Regarding investment strategy, Brenner advises focusing on the shorter end of the bond spectrum. He confidently predicts that "the next two fed meetings are going to be cuts of 25 basis points," irrespective of potential government shutdowns. He expresses skepticism about the reliability of government economic figures, noting their inconsistent "track records over the last few years," but acknowledges a "slowing job market for sure."

Given these factors, he recommends investors "should be more in the shorter end" to capitalize on the situation. He provides specific targets for yield curve spreads:

• The "210s should probably get out to 71" basis points.
• The "530s," which were "up to 126" and are "now down to about 103," are expected to "get back out there." Brenner anticipates a "more of a standard yield curve, much, much wider from from top to bottom," implying a steeper curve where long-term yields are significantly higher than short-term yields.

Impact of a Potential Government Shutdown and Alternative Investments

Brenner dismisses concerns that a prolonged government shutdown would "crack the bond market." He believes that sufficient economic data is available to gauge the economy's health. While the official unemployment number was delayed, a related survey "looked pretty much in line, a little bit higher than expected." The ADP number, though "a lot worse than expected," was accompanied by a comment in Barron's suggesting it included "annual adjustments," making it less reliable.

He points to broader hiring trends, noting that companies are "not just not hiring, not necessarily firing, but they're just not hiring." This trend is attributed to concerns about "AI and what AI is going to do to their employment and the number of people that they need." Based on these observations, Brenner reiterates his advice to "keep it in the short end" and "stay steady in the bond market." As an alternative investment, he suggests "investment grade corporates," which he finds offer "a good yield." These have performed well, being "up about seven and a quarter 7.5% so far year to date," making them "not a bad place to be."

Conclusion

Andy Brenner's analysis suggests that global bond markets are entering a period of rising long-term yields, influenced by Japan's fiscal policies and a robust, albeit evolving, US economy. He advocates for a strategy focused on the short end of the bond market, anticipating Fed rate cuts while expecting a steeper yield curve. He downplays the potential negative impact of a government shutdown on the bond market, emphasizing the role of AI in shaping employment trends and recommending investment-grade corporate bonds as a viable alternative.