Are 5% Yields Here to Stay? Jim Bianco's Bond Market Roadmap

Well, one of Wall Street's biggest bond bears says now might be time to buy bonds. He turned bullish a couple weeks ago. Let's bring in Jim Biano, president of Bianco Research. Jim, great to have you with us. Um, where in the curve and can you walk us through the riskreward? >> Yeah, I um I think that finally the bond market say from the 5year to the 30-year all at a 5% yield or higher. first time in 20 years that that's happened is now reflective of the overall state of the economy and that is a 3ish inflation rate and a 2ish real growth rate. So a nominal rate of about five. So if you have a 5% economy and you have 5% interest rates, that's fair value. And that's why after 6 years I finally said, okay, now's the time to start moving back into the bond market. So where in the curve? anywhere from 5 years on out I think is really from an fundamental standpoint is the appropriate levels for this uh for the interest rates and that's why they there are some value no longer the bond market expensive it's now kind of got value to it again >> Jim it's Karen thanks for being on how do you factor the tremendous amount of enterprise debt coming onto market how much does it move the needle here >> it moves into the margin um especially, you know, if we're talking about hyperscaler debt and everything else, it it it definitely does, but I think that that's largely been factored in. But if you back up and you look at the last 10 years, the last 15 years, corporate debt as a percent of GDP has been falling. Corporations have been deleveraging for a long time. So now we're getting one sector, maybe the hyperscalers, maybe if you want to widen it out, call it the AI trade in general, is releveraging itself. Okay, I think the market can handle that. Yeah, there's higher like there's definitely higher yields for those bonds and they've got higher expected returns, so they can handle that as well, too. So it's not a case that we're starting to see the whole market seizing on it. If I could say real quick, 2010 to 2020, we had negative interest rates. We had zero, we had money printing. That was the most abnormal period maybe in financial history. Now what we see is pretty normal and we're just so anchored to that period of 10 years ago and thinking, "Oh yeah, we're going to go back to zero. We're going to go back to money printing or something like that." No, I think that era is over. And now what we're looking at is normal interest rates. It's just been so long. We think that they're high rates and we wonder what's wrong with the bond market. The answer might be there's nothing wrong with the bond market. this is where there everything is supposed to be. Hey Jim, Tim, I think it's healthy as well on a relative basis to again history, but but this kind of a move and think of all the corporations or just I would just say companies and it's not the typically large corporations who have been deleveraging. But what's the credit impact here? Because if if you've been living in a world where rates were artificially kept down and we've now taken the beach ball off of the pressure and the water or the pool or whatever that is, it seems to me and you we have a credit cycle coming faster than we thought based upon a move that was faster than we thought. >> Yeah, I think you're going to start seeing a credit cycle and you're seeing it in the lowest rated credits in the triple C credits. They're a very small part of the market that the triple C credits are moving higher. the double the single B credits which would be the next best category of credits are not moving at all. But the reason that the triple C's are moving is because those companies refinanced at much lower rates. Now that they're looking at the possibility of refinancing at higher rates, the market's getting worried about their ability to do it. These are idiosyncratic companies. We're talking about gaming companies. We're talking about overleveraged cable companies. We're talking about lottery companies that run lotteryies, including the lottery of France. These are the companies that are in most trouble that are pushing those credits higher. But it's largely because the market is worried they can't refinance. Now, it's not in single B's, it's not in double B's, it's not an investment grade. But that's always the risk. If these rates keep going up, yields keep moving up, and you get to that point where companies are saying, "Look, we delivered, we're fine." Yes, but you refinance five years ago at much lower rates and you refinance with a five or sevenyear bond and it's coming due in two years and you're looking at much higher rates. That could be a problem. I don't perceive that as a problem right now, but it's definitely on my my radar watch list of things that could potentially be problematic.