Forget bitcoin — the biggest risk to stocks next year will actually be the bond market.
That’s according to Joe Zidle, a portfolio strategist at Richard Bernstein Advisors. The Wall Street analyst believes that investors are going into 2018 assuming that rising bond yields — which move inversely of prices and affect consumer borrowing costs — will stay low.
For that reason, Zidle thinks markets are generally unprepared for a possible rally in rates that could occur, thanks to a number of fundamental factors.
“I think in 2018, the big surprise could be higher 10-year Treasury yields, and that’s something that investors are not really positioned for,” he said last week on CNBC’s “Futures Now.”
The benchmark 10-year Treasury bond yield has fallen lower, even following the Federal Reserve’s decision to hike rates on Wednesday. It has been generally been moving between 2.3 percent and 2.4 percent for the past month, but has risen well above its year to date lows in early September.
According to Zidle, there are three things that could drive the 10-year yield higher, potentially pushing up borrowing costs across the economy.
“[First, we’re] seeing economies all around the world accelerating,” he explained. “Number two, we’ve got the tax package, which does bring a promise of the acceleration of growth,” he said, speaking about the GOP-led tax bill that was finalized out late last week.
“And then number three, we have the potential for inflationary pressures as labor markets get tighter and tighter,” he said. The rate of unemployment has dropped sharply as job growth picks up speed, meaning employers may have to pay more to hire increasingly scarce talent. At least for the moment, that hasn’t happened.
“The net result of all that could be an acceleration of growth, an acceleration of inflation which pushes the ten-year treasury yield higher,” he added.
The 10-year yield sat at around 2.37 percent on Friday, still sitting below the 2.44 percent at which it began the year.