Wells Fargo: The supply chain crisis ignited inflation, maintains a bearish stance on U.S. Treasury prices

The minutes of the Fed meeting released overnight showed that officials generally agreed to reduce the scale of asset purchases in mid-November or mid-December. The yield on the 10-year U.S. Treasury note also kept falling after the meeting minutes were released.

Michael Schumacher, head of macro strategy at Wells Fargo Securities, said that the inflation triggered by the supply chain crisis will further push up bond yields in the coming weeks.


Schumacher believes that the benchmark U.S. 10-year Treasury bond yield may reach 1.9% before the end of the year. Inflation is the number one risk and it is everywhere. It is expected that the actions of the Federal Reserve will also drive U.S. bond yields higher. Some central banks, including Norway and New Zealand, have adjusted their policy interest rates.

The minutes of the Federal Reserve meeting released on Wednesday showed that officials generally believed last month that in the context of rising inflation concerns, monetary stimulus measures during the epidemic should be reduced from mid-November or mid-December. Fed officials generally believed last month that even if the delta strain continues to pose a resistance to the economy, the Fed should begin to reduce monetary stimulus measures during the epidemic period from mid-November or mid-December.

The minutes of the US Federal Open Market Committee (FOMC) meeting on September 21-22 showed that participants generally agreed that while the economic recovery is still on the right track, it is appropriate to gradually reduce debt purchases until the middle of next year. Fed officials hinted last month that they are about to start reducing the size of asset purchases of $120 billion per month. Powell told reporters that this process may begin in November at the earliest and end around the middle of 2022. The minutes of the meeting show that Fed officials are facing a high degree of uncertainty in the two missions of achieving full employment and price stability.

Schumacher said that the Fed is likely to announce a reduction in bond purchases next month. In our view, this will push up bond yields. It will rise a little further, and then it may fall in December. It is expected that investors' unease about the debt ceiling and government funds will come back, thereby depressing yields. But Schumacher, who is pessimistic about bond prices, believes that the fall in bond yields will be temporary at that time.

He pointed out that all this has returned to inflation, and inflation will continue for a period of time. This has indeed cast a shadow on our market prospects. This problem is not unique to the United States, but concerns the entire world.

The latest economic data show that inflation is worse than expected. The US Department of Labor announced on Wednesday that the consumer price index rose 0.4% last month and 5.4% year-on-year, the highest year-on-year increase in more than 30 years.

Schumacher also talked about the issue of stagflation that has been widely discussed in the market recently. Although he is also worried about inflation, he does not belong to the stagflation camp. Stagflation refers to the fact that prices are rising during a period of slowing economic growth.

He said, frankly, this is exaggerated, and people will say that next year's growth will be slower than this year. Well, that's true. But the question is how slow is the growth in 2022 really disappointing? We think it is not. If the US economy grows by more than 2%, this may not be true stagflation.

Since the outbreak of the epidemic, Schumacher has been optimistic about economic growth. In December last year, he said that the new crown virus vaccine will greatly boost people's confidence in the economy and push up the yield of national debt. Since then, the 10-year U.S. Treasury yield has risen 72%.

From an investment perspective, Schumacher will only consider holding long-term bonds to avoid stock market fluctuations. However, US Treasury yields are not attractive to long-term investors because they cannot keep up with the rate of inflation.

Former debt king Gross said that the U.S. bond bear market "would not be a disaster" and the 10-year yield is expected to rise to 2%

Bill Gross, who compared bonds to "junk", said that the US Treasury bond bear market "will not be a disaster." In his latest investment outlook report, the 10-year U.S. Treasury bond yield may rise from the current 1.6% to 2% in the next 12 months. Play a role in the investment portfolio.

The market may have seen the long-term bottom of interest rates, but it is too much to expect a 30-year bear market comparable to the previous 30 years of bull market. The good days of bonds may be over, but they may do well as investors wait for the uncertainty associated with the US budget to fall and the northern hemisphere winter approaches energy prices soaring.