Last week, the U.S. September non-farm payrolls significantly exceeded expectations, leading to another "pain trade" for U.S. Treasuries. The yield on the 10-year U.S. Treasury note returned to above 4%. How much higher can U.S. interest rates rise?

On October 8th local time, Maggie Lake and Jim Bianco, President of macro research firm Bianco Research, engaged in a dialogue about the prospects for U.S. economic growth and inflation. They discussed whether bond bulls have overpriced the Federal Reserve's easy monetary policy, what rising interest rates mean for the economy and stocks, and other related issues.

Jim Bianco stated that there are two major disturbances in the current U.S. bond market. First, there are ongoing concerns about the situation in the Middle East, where oil facilities might be attacked, affecting the international supply of oil. Second, Hurricane Milton could become one of the most destructive hurricanes in U.S. history, causing substantial property damage. Insurance companies would be impacted as a result, and if there are property losses valued at tens of billions of dollars, they would have to sell tens of billions of dollars worth of Treasury bonds.

Advertisement

Regarding the question of why U.S. Treasuries repeatedly encounter "pain trades," Jim Bianco believes that the era of low interest rates is over, and the U.S. will return to the high-interest-rate era prior to 2009:

"I don't think we'll go back to pre-pandemic levels. We will face stronger nominal economic growth and inflation. If you think the Federal Reserve will bring interest rates down to zero, that's a mistake. That era is over. If they cut rates significantly, it would only lead to higher inflation, such as 7%, 8%, or 9%, rather than a stronger economy.

In reality, we're just claiming victory at the bottom. I believe inflation will start to rise, and the Federal Reserve's rate cuts will stimulate the stock market. Just a few days ago, the S&P hit an all-time high. So I think all of this will continue to support the narrative that interest rates will stay on a higher trajectory.

Jim also believes that the Federal Reserve may have lost control of the bond market:

"Usually, when the Federal Reserve starts to cut rates, we're already in a recession. But there's no recession now. So I think this time will be different. The Federal Reserve's policies could have adverse consequences, leading to inflation.

Technically, the old script is that the Federal Reserve cuts rates, and interest rates rise. But this time, they've risen a lot. And I think if they continue to rise, then the conclusion is that the Federal Reserve is providing stimulus when the market indicates it's not needed, which can only lead to bad outcomes.

Furthermore, Jim also pointed out the issues currently facing the U.S. commercial real estate market:Although the rate of commencement has declined, sales have decreased, and affordability has diminished, prices have reached an all-time high. This is due to population growth, particularly the influx of immigrants, which leads to increased demand for housing and keeps prices high. Lowering interest rates may stimulate another wave of purchases, but this would only result in housing inflation. The solution to the problem lies not in interest rates, but in the reorganization of the market.