Inflation Isn’t Dead | Jim Bianco on Why Bond Yields Are Headed Higher

Episode Summary

Executive Summary: Jim Bianco argues the bond market is signaling that the Fed cut too aggressively, too soon: short rates fell, but long yields and mortgages rose as markets fear renewed inflation, not recession. He ties labor-market strength to hidden migrant employment, strong wages, and a K-shaped economy, concluding that rates likely stay higher, credit is rich, and inflation risks remain elevated.

Main Topics: Bond-market rejection of the Fed’s 50 bps cut (Priority: 5/5): Bianco says the surprise-sized first Fed cut was too aggressive and the market responded by selling long-duration bonds, pushing the 10-year yield and mortgage rates higher. Inflation risk outweighs recession risk (Priority: 5/5): He argues the dominant macro threat is not labor weakness but re-acceleration of inflation, especially via wages and services, and that the Fed is underestimating this risk. Labor market distortions and immigration (Priority: 5/5): Bianco contends the rise in unemployment is partly due to labor-supply growth from migrants, many working off the books, rather than mass layoffs, which could mislead the Fed. K-shaped consumer economy and delinquency stress (Priority: 4/5): He says consumer stress is concentrated in the lower-income half, visible in rising auto and credit-card delinquencies, while higher-income households keep spending and support the economy. Portfolio positioning: bearish duration, selective credit, inflation hedges (Priority: 4/5): He explains Bianco Advisors’ index is underweight duration and corporate credit, overweight mortgages, short-term TIPS, and dollar exposure to benefit from higher rates and sticky inflation. Private credit growth and banking regulation (Priority: 3/5): Bianco sees private credit as filling a post-Dodd-Frank lending gap left by banks, though he thinks the area is early-stage and likely to become more bank-like over time. Commercial real estate and bank underperformance (Priority: 3/5): He links bank weakness to regulation, duration losses, and exposure to troubled commercial real estate, especially offices, while noting some real estate pricing has already adjusted.

Key Arguments: The bond market is 'rejecting' the Fed’s 50 bps cut because it signals the Fed may be overstimulating and re-igniting inflation. The first rate cut was heavily telegraphed and largely priced in beforehand, so long yields stopped falling and reversed. The labor market is weaker than a year ago, but not from layoffs alone; immigration-related labor-supply growth and off-the-books employment distort the unemployment rate. Services inflation is sticky because wages are still running around 4%+, above the Fed’s 2% target, supporting ongoing price pressure. A no-landing economy with steady nominal growth and higher wages is good for stocks and profits, but also dangerous for bonds and inflation. Corporate credit is too rich versus alternatives; mortgages, TIPS, and dollar forwards offer better yield/risk tradeoffs right now. Private credit is growing because banks are constrained by regulation and capital rules, not because credit demand disappeared. Consumer-credit delinquencies are a warning sign of K-shaped stress, but the upper-income cohort still drives spending and GDP. Banks have been hurt by regulation, duration risk, and commercial real-estate exposure; alternative asset managers are better positioned than banks. The Fed and markets may be misreading unemployment as labor weakness when it may partially reflect population and participation changes.

Data Points: Fed first rate cut: 50 basis points - Surprise September cut that Bianco says the market largely rejected 10-year Treasury yield move after cut: +48 basis points in roughly 19-20 trading days - Unusual post-cut rise in long yields 10-year yield before Fed cut: 3.60% - Level the day before the September rate cut 10-year yield in April: 4.75% - Starting point of the move that was priced out before the cut Total decline in 10-year yield from April to pre-cut: 115 basis points - Shows the rate-cut cycle was already priced in Unemployment rate a year ago: 3.5% - Used to show the rise in unemployment over the past year Unemployment rate at peak: 4.3% - A couple of months before the interview Current unemployment rate: 4.1% - Referenced as evidence of a modest but notable rise Estimated added population since 2020: 7 to 15 million people - Bianco attributes much of the labor-force distortion to immigration Georgia population comparison: 11 million - Used to illustrate the scale of added population Payroll benchmark revision: -818,000 - Benchmark payroll revision cited as evidence that prior job estimates were too high Bianco/Goldman-style adjustment to revision: ~300,000 fewer jobs - His view that part of the revision reflects undercounted off-the-books work JOLTS job openings: About 8 million - Used to argue demand for labor remains elevated Unemployed people: About 6.5 million - Compared with job openings to show openings exceed unemployed workers ADP payroll processor volume: About 20 million payrolls per month - Used to explain the ADP labor-market series Share of new jobs at firms under 50 employees: 42% - Since 2020 recovery, cited as evidence of broad small-business job creation Share of new jobs at firms under 20 employees: 25% - Supports argument that labor demand is widespread Headline CPI peak: 9.0% - June 2022 inflation peak Current CPI: About 2.3% - Headline inflation has fallen sharply from peak Core CPI: About 3.3% - Still above the Fed target PCE 12-month: 3.3% and 2.2% measures referenced - Used to show inflation has slowed but not uniformly to target PCE 6-month annualized: 1.9% - Below the Fed’s 2% target PCE 3-month annualized: 1.5% - Even softer near-term measure of inflation Atlanta Fed wage growth: 4.7% YoY - September 2024 wage growth cited as too hot for 2% inflation Unit labor costs: Around 4% - Supports the view that wage pressure remains elevated Quit rate peak: 3.0% in 2022 - Used to show labor churn was much higher post-pandemic Current quit rate: 1.9% - Below 2017-2019 levels, signaling less churn Consumer spending share by upper half of income: 70% - Shows spending is concentrated among higher-income households Consumer spending share by upper 70% of income: 85% - Supports K-shaped economy argument Current 10-year yield: About 4.12% - Year-to-date reference for bond-market stance High-yield spread: 2.99% - Example of very tight/rich credit spreads Mortgage rate/yield range: About 5.5% to 6% - Used to justify mortgage-backed securities over corporates Real yield on short TIPS: Around 2% - Base yield plus inflation accretion Portfolio TIPS sleeve: 15% weighting - Out-of-index inflation hedge in the index

Pivotal Quotes: "The market is rejecting the 50 basis point cut. It's saying to the Fed, you moved too fast." — Jim Bianco: Explaining why long-term yields rose after the Fed’s surprise half-point cut "I think the cycle changed in 2020." — Jim Bianco: His broader framework that the pre-pandemic low-inflation era is over "There is a consequence to doing that. And that consequence is inflation." — Jim Bianco: On the risk of the Fed stimulating too much to create more jobs

Implications: Listeners should expect a higher-for-longer rate environment, with long bonds vulnerable and mortgage rates not necessarily falling with Fed cuts. For portfolio strategy, Bianco favors short duration, TIPS, mortgages, and dollar exposure over rich credit.