David Rosenberg’s abrupt about-face on bonds this week has the high-profile Canadian economist defending his rationale to surprised readers.
In his daily newsletter to clients Monday as well as in a column for The Globe and Mail, Mr. Rosenberg - for years a staunch advocate for buying bonds - recommended a broad move into cash. That would mean holding very short-term Treasury bills and money market funds, but shunning the longer-term bonds he had been recommending on his unwavering thesis that the U.S. economy was heading into a recession. (Bond prices generally perform well when central banks are cutting rates in an effort to kickstart economic growth).
Mr. Rosenberg also suggested investors avoid holding commodities - gold in particular - in a reversal of his earlier recommendations.
Adding to readers’ surprise, Mr. Rosenberg’s research firm produces a monthly report called Strategizer that assesses a broad array of indicators that include sentiment, technicals, valuations and earnings fundamentals - and the latest report expressed high conviction for buying bonds.
In his Tuesday newsletter, Mr. Rosenberg tried to clear the air. Here is some of what he wrote:
“The point needs to be made that this is a tactical call and not yet a fundamental call. It merely reflects the heightened policy uncertainty that I sense became accentuated these past several days, especially as it relates to the Fed’s reaction function. I am specifically talking about Jay Powell’s body language last Thursday which was, at the margin, quite a bit different than his musings at the last FOMC meeting. He deliberately said he was in no hurry to cut rates further. The Fed does still seem bent on bringing the funds rate into neutral territory, however defined, so the path is still clear. It’s just the pace, and the pace matters. Remember that most of the backup in yields off the September lows occurred with the futures market having taken out well over 100 basis points of cuts for 2025. The thing is, there’s still 75 basis points of rate-relief by the end of next year being embedded in the bond market to this day.
“And also remember that a large portion of the move in Treasury yields out the curve is influenced by expectations of what the Fed is going to do. Everything else, while correlated to the bond market (inflation, growth, wages), comes in a distant second, third, and fourth. So the primary risk is the Fed’s reaction function if Donald Trump does end up hiking tariffs to the extent that he has pledged. I don’t believe tariffs, in the end, will prove to be inflationary but they will be a substantial price shock initially. If they were to happen with a 5% or 6% unemployment rate, that would be a different story than with a 4% jobless rate. And so, what is going to bother the Fed is the risk of a wage response to the tariff hikes. This is tough to handicap, obviously, but it is a serious enough risk.
“Strategizer did show improvement in the bond market outlook, but this model is based on the next twelve months. I am still fundamentally bullish on bonds on a longer-term basis, but I am concerned more on a near-term basis. And not that yields ratchet up, and prices head down from here in the Treasury market, as much as that to make the risk-reward tradeoff work in a flat yield curve environment, we need to have longer-term rates go down to generate the capital gain. Without that, you are garnering the same yield in the T-bill market than at the longer end of the curve… but on a risk-adjusted basis, the short end provides the same yield but with no duration risk.
“We ran the yield curve dynamics and found that with three cuts still priced in over the next year, if the Fed goes one and done then the 10-year goes to 4.7% and if it is done completely, then the repricing takes the 10-year yield to 4.8%. Then again, if we can get back to where we were just last September, when the futures market was priced for a Fed to move closer towards neutral in 2025, then we will get back to 3.6% once again. But likely not as quickly as I had been expecting — but I do think we will get there. Just later.
“But for the time being, I am expressing caution and becoming more defensive in nature. It’s the same thing with gold, which has only declined in U.S. dollar terms — the bullish 12-month outlook (and beyond) is intact. What has changed, to repeat, is the outlook for the next few months. It is very tough to time since this is all so event-driven and situational.”