The bond market is sending a signal that's hard to misread, with long-term yields climbing across the U.S., U.K. and Japan all at once.
Daleep Singh, PGIM's vice chair and chief global economist, says it's only going to get tougher before policymakers blink.
The 10-year Treasury yield jumped nearly 24 basis points last week to end Friday near 4.6%, the highest level in close to a year.
The 10-year is the rate that drives mortgages, auto loans and credit card debt, which makes it the price tag on every other loan in the economy. When it rises, borrowing gets more expensive for everyone.
Singh's diagnosis points to ballooning fiscal deficits, no political appetite to cut spending, and a Fed that's "uniquely hesitant to hike" rates. Bond buyers want more pay to keep holding government debt, so yields keep climbing.
Bond yields move slow, then all at once. Market Briefs tracks the trades that actually matter every weekday morning, plus you get a free 45-minute investing masterclass when you join.
Singh says hitting 5% on the 10-year is "probable" and would likely force a Treasury Department response that markets aren't fully ready for yet.
That response could include shortening the average maturity of new debt, ramping up bond buybacks, and possibly nudging the Fed toward buying long-end bonds to align prices with fundamentals. In English, the government would step in to hold yields down.
Singh calls that approach "financial repression," meaning the government keeps rates artificially low to make its debt easier to handle. Savers pay the price.
He thinks the bond vigilante trade running through the U.K. right now won't stay alive long, because policy responses tend to end these moves once yields get uncomfortable.
The Iran war is still the main pressure point, and Singh expects Brent crude to stay in the $80 to $100 range for the foreseeable future. U.S. shale producers in the Permian Basin can add only about 250,000 extra barrels a day, a tiny fraction of the shortfall caused by the Strait of Hormuz disruption.
Singh is also skeptical the blockade alone will force Iran to settle, since autocratic regimes tend to find workarounds through barter, crypto and non-dollar payments.
A deal is "probably a month or two away," in his view, with China potentially playing the role of trusted third party after Trump's recent Beijing summit with Xi Jinping.
The bond market doesn't have to wait that long to move.
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