The Bottom Is In For Yields, NOT Equities | Vincent Deluard

Episode Summary

Executive Summary: Vincent Deloire argues the U.S. economy is shifting from above-trend, fiscally boosted growth toward a stagflationary slowdown rather than a full recession. He says recent inflation and yield moves are driven more by seasonal quirks, policy tightening, and temporary liquidity flows than by a clean disinflation story. He also expects higher global yields and favors long Europe/rest-of-world over U.S. assets.

Main Topics: Inflation seasonal distortions and the January CPI pop (Priority: 5/5): Deloire explains that January inflation often looks hot because seasonal adjustment models undercount underlying price pressures when contracts reset at year-end. He says today’s softer core inflation print was a reversal of that distortion rather than proof of a structural disinflation trend. Stagflationary slowdown, not recession (Priority: 5/5): He says growth is slowing because policy is becoming less supportive, but he does not expect a classic recession. He views the current environment as stagflationary: weaker growth combined with sticky or rising prices, especially in survey data like ISM. State and local government spending as the hidden fiscal driver (Priority: 5/5): A key part of his thesis is that local/state spending surged for years due to COVID aid, infrastructure bills, and tax-supported expansion. He expects fiscal 2025 to mark the end of that support as buffers run down and tax cuts constrain revenue. Treasury market dynamics and temporary yield relief (Priority: 5/5): He argues recent rallies in Treasuries are being driven by temporary liquidity sources—Treasury General Account drawdown, reverse repo runoff, and dealer balance-sheet absorption—rather than a durable change in deficit fundamentals. Target-date fund rebalancing and near-term market flows (Priority: 4/5): Deloire says large retirement flows may force equity buying and bond selling later in March, creating a technical headwind for bonds and a tailwind for stocks after recent volatility. Global yields, deglobalization, and the case for rest-of-world assets (Priority: 5/5): He ties rising yields in Germany and Japan to a broader renationalization of capital and higher defense/fiscal spending. In his view, Europe and Japan keeping savings at home weakens the historical recycling into U.S. assets and supports a long-rest-of-world trade.

Key Arguments: January CPI is often distorted by seasonal adjustment mechanics, so a hot print does not necessarily mean inflation is re-accelerating. Inflation is still not on target after four years, and many CPI days are increasingly “nothing burgers” because markets focus on bigger macro forces. The slowdown in growth is real, but it is more likely to look like stagflation than recession because policy support is fading while prices remain sticky. State and local government spending has been a major, underappreciated engine of growth for four years and is now rolling over. Doge and tariff headlines matter, but the bigger fiscal story is the withdrawal of spending support and the fact that tariffs function as tax hikes. The Treasury market’s recent strength is partly mechanical and temporary: TGA depletion, reverse repo drawdown, and dealer inventory growth are not permanent sources of demand. The Fed is less able to act preemptively because it has become too data-dependent and has been burned by earlier calls; it is unlikely to rescue the economy quickly if growth softens. Higher global yields in Germany and Japan reflect a structural shift toward more public spending and domestic capital retention, reducing foreign recycling into U.S. duration and risk assets. Long Europe / rest-of-world is attractive because valuation, policy, and capital-flow dynamics all favor non-U.S. assets versus expensive U.S. equities. Bond yields likely bottomed for now; he expects the 10-year Treasury yield to move back up over time, possibly toward 4.5% and above 5% later. The bond rally is being supported by temporary flows, not a solved fiscal problem; the underlying duration/deficit issue remains unresolved. Rebalancing by target-date and other fixed-allocation funds could force bond selling and equity buying as March progresses.

Data Points: Core inflation month-over-month: 0.4% to 0.2% - Referenced as the reversal from last month’s hot print to today’s softer core CPI reading. U.S. inflation target: 2% - He says the U.S. has not printed a 2% inflation number for about four years. Local government spending growth: 10%+ YoY for four straight years - Used to support the claim that state and local spending has been a major growth driver. California budget surplus: $100 billion - He cites California’s 2023 budget surplus as an example of the fiscal boom that is now fading. State tax cuts: 20+ states - He says many Republican-led states cut taxes, tightening future spending capacity. State and local fiscal outlook: modest contraction in 2025 - His forecast for state/local spending after years of expansion. Daily Treasury Statement taxes (excluding income/employment taxes): +7% YoY - Presented as a real-time indicator showing tax collections remain robust. Federal salary expense: +12% YoY - Used to argue that federal payroll spending remains elevated despite DOGE headlines. Treasury General Account (TGA) usual level: $800B-$900B - He says the TGA is normally kept around this range at the Fed. TGA current level: around $700B - He says the TGA has been drawn down by a couple hundred billion. Reverse repo facility peak: $2.5T - He cites the post-QE excess liquidity peak in the Fed’s reverse repo facility. Reverse repo facility current level: about $600B - He says this pool is still being drained, providing temporary liquidity. Primary dealer Treasury holdings: about $400B-$450B - He says dealer inventories have risen from a normal roughly $250B level. Primary dealer average Treasury holdings: about $250B - Used as a baseline for normal dealer balance-sheet absorption. 10-year Treasury yield peak: near 5% - Referenced as the recent high during the yield selloff. 10-year Treasury yield current level: about 4.2%-4.3% - Used to describe the current Treasury rally and his expectation that the low is in. Target-date fund market size: about $4T - He uses this to estimate rebalancing flow impacts. Hypothetical 60/40 rebalance need: 7.4% shift - He estimates a 60/40 fund would need to move this much from bonds to equities after the recent move. SOMA duration: 14 years - He cites the Fed balance sheet’s long duration as a challenge. Treasury duration: 3.5 years - He contrasts this with the shorter duration of Treasury issuance. German fiscal package: 800 billion - He cites Ursula von der Leyen’s headline number for European defense/fiscal mobilization, though he says the real number is lower.

Pivotal Quotes: "I think the bottom in yields is in, and the bottom in stocks is not." — Vincent Deloire: Summarizing his core market view near the end of the fixed-income discussion. "Tariffs are tax hikes. They're just, we should call them for what they are." — Vincent Deloire: Explaining why tariff uncertainty and actual tariffs both act as fiscal tightening. "We are in that. I mean, again, the system leads there. I mean, at some point it's insane, but at some point you got to do something." — Vincent Deloire: On the possibility of a centennial bond or other debt-restructuring style solution for the global reserve system.

Implications: Listeners should expect weaker U.S. growth, sticky inflation, and higher long-term yields than the market recently priced. The setup favors relative value outside the U.S., while bond rallies may prove temporary unless recession risk rises sharply.