The chance for a slash in the US corporate tax rate to 20% from 35% may be the structural reason that we may see the end of the 36-year Treasury bull market. Now don’t get me wrong, slashing corporate taxes is a very good thing… I am just warning that implementing a loose fiscal policy on top of an already very loose (and unprecedented!) monetary policy like the ones we’ve seen for the last 8 years may finally burst the bond bubble and get us into a 30-year bear market.
Hamish McRae has recently wrote that, as a general rule, “big economic and financial trends take longer to get going than you would expect but happen more violently when they do.”
Goldman Sachs also believes the “bull market in everything” will soon come to an end. The result will be either “slow pain” or “fast pain”, as values adjust to historic norms. Meanwhile, blue-chip companies have sold more than $1 trillion of bonds in 2017, passing that milestone for the sixth straight year. Corporate debt levels are extremely high.
An article on MoneyWeek highlights it well:
“The effect on bonds, however, could be far more significant. This (tax) package comes as the economy “is already at or close to capacity”, says Hamish McRae in The Independent. Growth reached an annualized 3.3% in the third quarter, and the labour market is very tight. Adding fuel to the fire now could lead to a nasty jump in inflation. That would be a shock to absurdly overpriced bonds, especially since everyone thinks inflation has disappeared and central bankers almost always fall behind the curve.
We were in exactly this situation in the 1960s… with inflation apparently vanquished, the labour market tight, and fiscal and monetary policy extremely loose… this tax package “will definitively put an end” to the 36-year Treasury bull market.”