Economic Recovery to Hurt US Treasuries

02/22/10 Baltimore, Maryland – Most economists now “expect the recovery to remain firmly on track.”

That’s the word today from the National Association of Business Economics (NABE), the group officially tasked with deciding if the economy is growing or receding. The NABE forecast 3.1% GDP growth this year, largely in line with their last broadcast back in November.

That “firm recovery” will also move the unemployment rate down one tenth of a point this year, the group forecast, from 9.7% now to 9.6% in December.

That’s good, right? C’mon… We never trust good news!

“Our concern remains,” Agora Financial’s resident economist, Rob Parenteau, says “as investors gain more confidence in private sector growth,” many questions about their recent behavior arise:

For example, investors “may notice that ‘core’ inflation remained above zero all the way through the deepest and longest recession since the Great Depression. If core inflation is driven by slack in the labor market and slack in the use of productive capital, why did deflation fail to show up in one of the sloppiest business cycle recessions in decades?

“If many of the investors that sold mortgage-backed security debt to the Fed under the Fed’s quantitative easing (QE) program,” Parenteau continues, “then turned around and reinvested the proceeds in Treasuries, then the cessation of QE will result in more of a backup in Treasury bond yields than many investors currently expect.

“If at the same time, institutional investors are growing more confident in a self-sustaining economic recovery (and this is certainly where they have been placing their money over the past two weeks), the investment rationale to buy and hold Treasuries at historically low yields is likely to be further undermined.”

One conclusion: If the recovery is here for real, Treasuries are about to get smacked. Even by the Fed’s own logic. Right on schedule, if you’re following the Trade of the Decade.

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

View articles by Addison Wiggin

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