Paul Tudor Jones, a hedge-fund icon, said investors should steer clear of bonds as he considers government paper “overvalued and overowned” and primed for a tumble.
That’s a scenario that would drive yields, which move in the opposite direction of prices, sharply higher. Jones is predicting the yield for the 10-year Treasury note TMUBMUSD10Y, -0.16% will hit 3.75% by the end of 2018. Yields stand presently at 2.81%.
Jones is widely credited with predicting, and profiting, from the stock-market crash in October of 1987, which saw the Dow Jones Industrial Average DJIA, -1.68% lose 22% of its value, marking the largest percentage decline for the blue-chip benchmark in its history. Jones founded Tudor in 1980 and became known for trading everything from currencies to commodities. His track record has featured middling returns and an exodus of billions from his hedge fund in more recent years.
Jones told Goldman Sachs — for a research report dated Wednesday and titled “Has a bond bear market begun? — that a coming bear market in bonds is the result of easy-money policies that has set the stage for out-of-control inflation:
| The bear market in bonds is the natural upshot of the bull market in monetary and fiscal laxity... We are setting the stage for accelerating inflation, just as we did in the late ‘60s. |
The Fed’s dogged pursuit of a 2% annual target for inflation, the level the central bank views as healthy for the economy, is setting the stage for a “sharp spike in inflation, created financial bubbles on the verge of popping, and enabled the recent U.S. fiscal stimulus, which [Jones] thinks we will regret,” the Goldman note said.
| Central banks love to look in the rearview mirror. They typically operate by waiting for the most obvious moment they can to make a decision to fight yesterday’s battles. Heck, the ECB hiked rates in July 2008! It is why price targeting is such a bad idea in rate decisions, as is its first cousin, gradualism. There is little in human nature that is linear, so why should rate policy be that way? |
In such a scenario, Jones says the Dow, S&P 500 index SPX, -1.33% and the Nasdaq Composite Index COMP, -1.27% aren’t likely to provide any cover for markets. He instead recommends owning commodities or cash.
Jones’s comments fall in line with similar comments from the likes of hedge-fund notable Ray Dalio and fixed-income pro Bill Gross, who have also proclaimed that bonds are in a bear market.
Read: Dalio says investors may see ‘the largest bear market in bonds’ since 1980-81
Of course, this isn’t the first time Jones has outlined his worries about asset bubbles. Last month in a note to clients he said we are “in the throes of a burgeoning financial bubble.”