Economic Recovery to Hurt US Treasuries

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?

CPI Data

“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.