World Economy

Perfect Storm Brewing in US Bond Market

Perfect Storm Brewing in US Bond Market
Perfect Storm Brewing in US Bond Market

Bryce Doty is warning that an unusual bond market trend could catch Wall Street by surprise. The SIT Investment Associates senior portfolio manager sees the yield curve inverting faster than anticipated.

“You have these unprecedented events—the amount of bonds being issued by the treasury in this concentrated, short part of the curve. At the same time, there is an unprecedented, unwinding of this massive balance sheet,” Doty said Tuesday on CNBC’s “Futures Now.” “Those technical issues are all creating a perfect storm for yield-curve inversion.”

Inverted yield curves, when yields on short-term bonds exceed those of long-term notes, are historically sparked by economic troubles. But this time is different, according to Doty.

“Usually, it is the outlook for the economy that starts to sour, and that’s what causes traders and investors to drive yields down in anticipation that the fed at some point is going to need to cut rates,” he said. “What is happening now is an inversion caused by these technical factors that we’ve never had before.”

Inverted yield curves are detrimental because they damage lending and credit.

“Normally, a yield curve inversion is very bad for the economy,” said Doty, who runs the firm’s RISE ETF, which is designed to profit from rising rates.

His latest thoughts came as the federal reserve began its two-day meeting on interest rates. Even though an interest rate hike isn’t expected Wednesday, Doty suggests vigilance.

“The fed is going to reiterate their belief that the economy is very strong, indicating at least two more rate increases this year and probably two to four next year,” Doty said. “That’s going to continue to drive up yields on the short end.”

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