Don’t look now, but the pain from higher energy prices may bite Americans twice.
With the Iran war unending and oil prices stuck above $100 a barrel, bond traders worried about rising rates have sold long-term US government debt and boosted the economy in recent days. That has the effect of raising bond yields, including the benchmark 10-year Treasury notewhich rose nearly 24 points over the previous week to end Friday near 4.6%.
The 10-year Treasury yield affects housing costs, auto loans, credit card rates and other consumer debt. When it goes up, consumers feel the pinch. Its rate is set by the market, not the Federal Reserve.
To shed light on what’s happening at the intersection of global politics, energy, and debt, CNBC reached out to Daleep Singh, vice chairman and chief global economist at asset manager PGIM. Singh has seen world power conflicts up close: As deputy national security adviser under President Joe Biden, he engineered that administration’s economic effort to cut off Russian oil revenues. Earlier in his career, Singh headed the market desk of the New York Federal Reserve Bank, a critical position that looked directly into the depths of the global financial system.
Singh may have been nominated by a Democrat, but he doesn’t sing the party line. He began by praising Kevin Warsh, the conservative economist who was nominated by President Donald Trump and confirmed by the Senate on Wednesday to be Fed chairman.
The transcript of Singh’s interview has been edited for length and clarity. He spoke about Zoom on Friday.
Q: How do you think Kevin Warsh will fare as Fed chairman?
Daleep Singh: I have hope for Kevin Warsh. His intellectual work focused on how to support the Fed’s most important asset, which is its credibility. That would not matter much when the central bank is under political attack. I think he will be thoughtful and deliberate in judging the trade-offs necessary to maintain monetary policy independence, perhaps at the expense of some of the responsibilities the Fed once had.
It is also very important to have a war-tested Fed chair. Warsh has been, because of the global financial crisis. [Warsh was a Fed governor from 2006 to 2011.] He was hailed by almost everyone as the Fed’s eyes and ears on Wall Street, and how that was going in terms of conveying feedback to the real economy.
People who dismiss him as the opposition are missing a lot of what he brings to the table in terms of performance across the board.
Having said that, look, I don’t think the Fed should be cutting rates right now. We will soon find out how much scope there is to do the right thing.
Q: There is an idea that Warsh will try to convince the Fed to cut rates and get laughed at. Then Trump will explode on him. Do people look down his ability to manage Trump?
Singh: The deeper question is whether it is in President Trump’s political interests to push the Fed to ease. The market is now pricing in a bigger chance of a Fed hike than easy this year, and for good reason.
We have seen a structural breakdown in the economy. These supply-side shocks are not isolated, nor are they reversible in terms of impact on the global economy. They are related and complementary.
Just look at the last five years, we’ve had nothing but supply shock after supply shock, from Covid, to Ukraine, to changes in tax measures at immigration borders, and now Iran. This is an overriding supply side shock that suggests to me that we are going to be in a structurally higher inflation zone.
Question: The 10-year Treasury yield rose 4.6% at one point on Friday, the highest in nearly a year. It produces from within UK, Japanand in other places they are waking up. What is your prognosis for the global bond market?
Singh: It is a byproduct of these forces that we are talking about. If we are going to live in a world where the deficit continues to increase indefinitely, there is really no political will to do something about that, and you have, at least in the US, a central bank that is, let’s say, reluctant to go up, then it makes sense that the yield curve will go up. Long-term yields will continue to rise, because buyers need more compensation against the currency and inflation risk they are taking on now.
Savvy investors will understand that this is a multi-stage process, and the US government will also decide how to respond to a sharp and sustained rise in long-term yields.
If this continues, and let’s say the Treasury yields [on the 10-year note] march to 5% or more, it won’t be long before the Treasury secretary says, “Listen, I’ve got a toolkit too, and I’m not afraid to use it.” The Treasury Secretary could shorten the weighted maturity rating of our debt issuance, use the aggressive recovery tool, and he could be a jaw-dropper in the market with the Fed and say we may have to engage in long-term bond purchases to align with long-term fundamentals.
In other words, that’s financial pressure [when the government artificially holds interest rates down, making debt more manageable at the cost of harming savers, among other risks].
I think that’s the end game for the bond market, because 5%-plus bond yields are unsustainable for a variety of reasons.
Q: What is the risk that the 10-year yield will hit 5% in the next few months?
Singh: I think it’s possible. We are on the edge of bond-vigilante trading right now. It’s happening in the UK These measures often take on a life of their own, and are not fixed until there is a policy response.
This is a smart US government that understands the dynamics of the bond market and knows exactly how to capture rising yields. I personally don’t think the bond-vigilante trade will survive very long.
Q: Let’s turn to Iran. Can you put your thoughts on what happened there?
Singh: I think neither side has a superpower, but neither the US nor Iran fully recognizes that fact.
The political and economic costs of a global attack that brings about regime change in Iran are very high for President Trump, both because of the number of casualties on the ground, but also because Iran will undoubtedly also use its asymmetric advantages in the Strait of Hormuz and the Red Sea.
In Iran, I think it also understands that if it overplays its hand, it could reverse what it is trying to stop, which is the US sending in ground troops.
We need both sides to realize the fact that neither side can win over the other, that is why we are in this problem.
The agreement will need to be verified by a trusted third party. There is absolutely no trust between the US and Tehran at the moment, because bombs have been falling every time they sit down to negotiate. This is where China comes in, and I would be interested to hear more details of what was said and agreed in Beijing [during Trump’s summit with Xi Jinping].
It’s probably a month or two before this kind of deal comes together, because the longer it goes on, the more unsustainable the conflict is for the White House.
Q: Anyway, a month or two more would mean more economic pain.
Singh: I was just in Texas. I heard directly that the most that can be expected in the Permian Basin, for example, in terms of additional production, is something like 250,000 barrels per day. That is only a small part of the shortage in the Strait of Hormuz. [The oil market may be missing as much as 100 million barrels a week, according to some estimates.]
The situation is getting really bad. I think we have a risk premium going on Brent oiland will be at $80 to $100 a barrel for the foreseeable future.
Question: What is your opinion on how long the Iranian people can withstand the kind of economic pressure they are under now since the embargo?
Singh: My personal experience, in terms of applying great economic pressure to dictatorships, is that they tend to have a longer runway than democracies, Western leaders think, because necessity is the mother of invention. They’re going to, they’re going to develop mechanisms to get paid in exchange arrangements, in crypto, in non-dollar currencies, and it becomes a cat and mouse game.
Because their risk is there, they have a strong incentive to find ways to keep getting paid that are beyond our control.
I was very skeptical of claims that sanctions alone were enough to make the Iranian regime commit to a bad deal.
