CNBC/Stephanie Landsman
‘This bond market is so radically oversold,’ economist David Rosenberg says

Economist David Rosenberg says he made a career by not following the herd, and his bond forecast could be considered the latest example.

According to the Rosenberg Research president, this year’s rate yield shock surrounding the benchmark 10-year Treasury Note is temporary.

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

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

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

“The problem I have with that view is that all this stimulus is temporary in nature and rolls off next year when we face the proverbial fiscal cliff,” Rosenberg wrote in a recent note.

Yet, Rosenberg won’t completely rule out a run to 2%.

“That would be on a huge technical overshoot,” he said. “A 2% move in the 10-year note I’ll tell you would be the same as 3%-plus in late 2018. It’s something that you want to buy.”

Even though he expects inflation jitters to subside, he still sees trouble for the stock market. Rosenberg, who served as Merrill Lynch’s top North American economist from 2002 to 2009, has been known for his bearish calls.

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CNN Business/Anneken Tappe
The US economy was stronger than we thought last quarter. But it still wasn’t strong enough

The US economy fared ever so slightly better in the fourth quarter of 2020 than initially thought. The nation’s gross domestic product grew at an annualized and seasonally adjusted rate of 4.1%, the Commerce Department reported in its second reading of the data on Thursday.

That’s up from the annualized and seasonally adjusted 4% growth rate reported in late January, but slightly less than the 4.2% economists had predicted.

The small improvement reflects higher residential and inventory investments and increased state and local government spending. These upticks were partially offset by consumer expenditures being revised lower.

In a normal year, an annualized GDP growth rate of 4.1% would be reason to pop some champagne. But in the abnormal world of the pandemic, it leaves the United States way too far in the hole.

The slight bump doesn’t change much in the overall economic picture for last year. The US economy still contracted 3.5%, the worst decline since 1946. This number was not changed from the previous data estimate published in January.

For reference, US GDP, which is the broadest measure of economic activity, dropped by 2.5% in 2009, the height of the financial crisis.

Washington has more work to do before the economy is back to its pre-pandemic strength. But although lawmakers broadly agreed that action was needed last year, the opinions on next steps are more diverse now.

Deficit hawks worry that adding more stimulus will create a deficit so large that it will become a problem later on. It’s one of the hurdles for President Joe Biden’s proposed $1.9 trillion stimulus package.

Treasury Secretary Janet Yellen has repeatedly said that worries over the high deficit should be addressed after the recovery. She has also pointed to the current low interest rates as helpful in shouldering the huge debt burden.

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Yahoo Finance/Julia La Roche
Warren Buffett: Bond investors world-wide ‘face a bleak future’

While Warren Buffett isn’t known to prognosticate on where interest rates are heading, he warns that fixed-income investors “face a bleak future.”

“[B]onds are not the place to be these days,” Buffett wrote in his annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders.

His warning comes amid a sharp rally in long-term interest rates that saw the 10-year Treasury yield (^TNX) recently touch its highest level in a year. Though it’s worth noting interest rates have been trending lower for nearly 40 years.

“Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at year end – had fallen 94% from the 15.8% yield available in September 1981?” he wrote. “In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.”

He noted that some insurers and bond investors “may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers.” In other words, they may allocate more of the portfolios to financial instruments like leveraged loans and high-yield bonds, aka junk bonds.

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