By Pam Martens and Russ Martens: December 17, 2024 ~

Arif Husain, Chief Investment Officer, Fixed Income, T. Rowe Price

Arif Husain, Chief Investment Officer, Fixed Income, T. Rowe Price

Arif Husain is the head of Global Fixed Income and Chief Investment Officer (CIO) of the Fixed Income Division of T. Rowe Price. He is also a member of the firm’s Management Committee. Husain holds a B.Sc. (honors) in banking and international finance from the City University London, Cass Business School. When Husain speaks, Wall Street listens.

What Husain has been saying since October is that the U.S. is on a collision course with higher interest rates.

In October, Husain released his interest rate outlook for the next six months, writing the following about the benchmark 10-year U.S. Treasury note, whose yield impacts mortgage rates and a wide swath of debt instruments:

“I think that the 10-year Treasury yield will test the 5.0% threshold in the next six months, steepening the yield curve. There are three dynamics at play: 1. Fed rate cuts could limit yield increases on short-maturity Treasury bills. 2. Ongoing issuance by the Treasury to fund the government’s deficit spending is flooding the market with new supply. 3. The Fed’s quantitative tightening has taken a large, reliable buyer of Treasuries out of the market, further skewing the balance of supply and demand in favor of higher yields.”

Husain’s analysis in October had yet to factor in the outcome of the U.S. presidential election. Now that there is no longer any doubt that President-elect Donald Trump and his promised tariffs and tax cuts must be factored into any interest rate forecast, Husain had this to say on a November 22 Global Market Webinar at T. Rowe Price when queried by his colleague, Investment Specialist Ritu Vohora:

Vohora: So coming to you now, Arif. You know, Blerina talked there about one of the key risks is around fiscal policy. The U.S. deficit is on track to be 7% of GDP at the end of the year. I think the interest expense alone is going to be higher than the defense budget, which is mind-boggling. When should we start worrying about the debt burden? I feel like we talk about it, but when do we actually start worrying?

Husain: You should be worried right now. I think, certainly, the initial reaction in the bond market post-the-election was to go after some of the fiscal laggards. So, the European peripheral market got hit. The UK bond market got hit, and so did the U.S. Now there’s been plenty of volatility.

So I think you got to be worried about the bond market. I’m on record of saying I think the U.S. 10-year will get to 5%. I said that before the election.

There’s only more evidence, new information, to think, to believe that and frankly, I said 5%, because 5% you need to go through 5 to get to 6.

So for me, what will create fiscal austerity? What will create a little bit more discipline around the deficit? Can’t see it. I really can’t see it. And really, I think the real thing that most people miss when they’re just looking at the U.S. fiscal deficit is a really simple point, which is the U.S. are not the only people who need to sell a lot of debt. A huge, huge amount of debt.

You know, Justin was talking about Chinese stimulus a moment ago. Guess what that is: debt issuance. And every country with the exception of Germany, actually, the German debt break is one of their structural, one of the structural issues holding them back a little bit, but from a bond holder’s perspective it’s a positive, right, but other than that, everyone is selling lots and lots and lots of debt in a time when central banks are no longer buying it. And so from a global perspective, I think we really need to worry about deficits and the lack of plan to address them. And the U.S. is at the front of the queue there. You know, every week, every second week, they’ve got to, they come with massive bond issuance and really to my mind, bond yields need to be a lot higher to be competitive. And you’ve got to see a much steeper yield curve to make that longer duration debt a lot more attractive.

At this point in the webinar, another colleague asks Husain, “Arif, did you, did you just call for 6% U.S. 10-year as a possibility?” Husain responds: “I think we’ll see 5 before 6, that’s for sure.”

This morning, Husain’s outlook for rising interest rates in the U.S. is getting a lot more attention. Bloomberg News has put excerpts from a new report by Husain in a headlined article on its digital front page. The article is apparently syndicated, because it is being picked up by other news outlets, including Yahoo! Finance.

If Husain is correct and the 10-year Treasury yield blows past 5 percent on its way to 6 percent, there are going to be a lot more than bond holders licking their wounds. (As yields on bonds rise in the secondary market, their market price declines in order to bring their yield to the going rate on new bonds of the same maturity.)

Because the yield on the benchmark 10-year Treasury impacts mortgage interest rates, a rise in its yield could price more home buyers out of the market because they would be unable to afford the higher monthly mortgage cost. This could lead to a slump in home prices and potentially negatively impact consumer sentiment.

A yield of 5 percent or higher on the 10-year Treasury note could also lure money out of stocks and into Treasuries. Should a stock exodus become a stampede, a handful of tech stocks trading at nosebleed valuations might plunge, leading to more selloffs.

Since Donald Trump’s ego is bound up in the stock market only rising when he’s in the driver’s seat, this could lead to Trump making imprudent demands on the Fed Chair, Jerome Powell, or firing him as a scapegoat. Since Powell has said he will serve out his term as Fed Chair, irrespective of Trump’s threats to fire him, a Trump-Powell debacle could unnerve foreign investors, leading to capital flight out of the U.S.

In fact, we’re shocked we haven’t seen that already, given the chaos Trump has outlined for his first 100 days in office.