Is It Time to Start Buying Bonds? | Jim Bianco

Jim Bianco · Bianco Research, L.L.C.

Has turned positive on bonds for the first time in six years, because of where rates sit relative to the economy.

After about six years of warning that bonds were overvalued, Jim says he has turned positive on the bond market, and the reason is where interest rates sit relative to the economy. He sets up that comparison by describing the economy: real GDP growing about 2.5%, at the upper end of the 2 to 2.5% potential range, and inflation stuck around 3%, which puts nominal GDP near 5.5%. The full mechanism linking rates to that backdrop is not spelled out in this segment.

“I have turned positive on the bond market for the first time in six years, and it has to do with where interest rates are relative to the economy.”at 5:03

Jim Bianco · Bianco Research, L.L.C.

Bonds are no longer expensive now that the yield curve sits at 5-6%, though they may get cheap later.

Bianco turned bullish on bonds after six years of warning they were overvalued. His argument is that bonds were expensive because yields sat too low relative to the economy's nominal growth. He expects roughly 3% inflation plus about 2.5% real growth, a 5-6% nominal economy. Nearly every point on the curve, from the 5-year note to the 30-year bond, has now moved above 5%, which he says is the first time in twenty years. He adds that the 10-year yield has averaged 5.9% over the last 225 years, versus 5.3% today. So yields have reached appropriate levels for the economy and are no longer expensive. He explicitly does not call them cheap yet, and says that could come later.

“bonds were expensive because interest rates were too low. But now that almost all of the yield curve has moved into that 5% to 6% range and I've defined the economy as being a 5% to 6% economy, they're now no longer expensive. I didn't say they're cheap.”at 42:48

Jim Bianco · Bianco Research, L.L.C.

Long yields are driven mainly by private capital demand and growth outlook, not deficit crowding out.

Asked what has been pushing long yields up, Bianco says deficits and debt are a real problem but not the primary driver. Demand for capital and the economic outlook matter more than the crowding-out theory, where federal debt and interest costs push yields higher. Nominal yields reflect both inflation and real growth. Demand for capital and the economic outlook explain most of the move in long rates.

“it is a problem and I don't want to dismiss it, but it's not the primary thing. I think it is demand for capital and it is the outlook for the economy that is more driving interest rates than the crowding out theory”at 46:59

Jim Bianco · Bianco Research, L.L.C.

US inflation is stuck near 3% and won't disinflate because goods deflation has ended.

Jim argues inflation has run above trend for five years and will stay there because disinflation has stalled, not because inflation is accelerating. From 2001 to 2020, China's WTO entry kept goods prices falling about 0.5% a year, offsetting services inflation, which never dropped below 2%. Post-COVID, deglobalization, tariffs, wars and supply-chain problems have pushed goods inflation to about +1.8% a year. Adding that to services leaves inflation in the high 3s. His feared scenario of 4 to 6% needs a shock such as an oil spike, but his base case is persistence near 3%.

“I've been arguing that inflation has been running above trend now for five years and will continue to do that, not because the fear that inflation is going to go up, but because we can't disinflate.”at 5:03

Jim Bianco · Bianco Research, L.L.C.

PCE inflation has run above 2% for five-plus years and is now above 3%, a real problem.

Bianco prefers the core inflation measures and the PCE measures, since the Fed has used chain-weighted PCE since 2000. Most of those readings show inflation above the 2% target for more than five years and currently above 3%, which he calls a problem. He links this to affordability, the top issue in political polls. He notes that since COVID average prices are up about 31% while average wages are up about 25%. He argues that the gap, which looks marginal, is politically significant.

“for the last five plus years, we have been above 2% inflation and currently are above 3% inflation. That is a problem.”at 40:35

Jim Bianco · Bianco Research, L.L.C.

Consumer spending is driven by asset-owning top earners whose wealth gains outpace wage-squeezed households.

Jim describes a K-shaped economy. Since April 2020, CPI is up 31% and average hourly earnings are up 26%, so paycheck-to-paycheck households are falling behind. Asset owners have offset this, with home prices up 30 to 40% and stock portfolios roughly doubling. He cites Moody's Mark Zandi's estimate that the top 20% of earners account for half of US retail sales, the most concentrated ever. He argues this reflects wealth effects, not salaries, citing San Francisco homes at $5,000 a square foot as an example of asset-driven wealth. Spending is coming from assets, not labor income.

“They're not spending the fruits of their labor, their income. They're spending the assets that they were awarded that are skyrocketing in value.”at 11:38

Jim Bianco · Bianco Research, L.L.C.

AI-related stocks drive most US stock gains and hold about half of S&P market cap, unprecedented in 120 years.

Using a JPMorgan list of 41 AI-related S&P 500 companies, Jim says they make up 49% of index market cap. Adding SpaceX/xAI and eventually OpenAI and Anthropic would push that toward 55%. Since ChatGPT's launch on 11/29/2022, about 70% of US stock market gains have come from these 41 companies. He says the last time a single theme exceeded 50% of market value was probably the 19th-century railroad boom. He links this to capital recycling: foreign money flows into US markets because the AI innovation boom is unique to the US, which is propping up the market.

“70% of the gains in The US stock market, seven zero, have been AI related.”at 14:26

Jim Bianco · Bianco Research, L.L.C.

Passive investment inflows are an independent upward force on stocks, set to reverse as baby boomers retire.

Jim sees passive investing as an independent source of positive uplift to equity prices, not just an amplifier of trends. Payroll deductions into index funds and ETFs run automatically each month without investors reconsidering allocations, so money keeps flowing in. He expects this to reverse because of demographics: as the baby boom retires, people will start spending down their savings, turning net inflows into outflows. The flows aren't hurting the market now, but he expects that to change.

“I think it's more of the independent positive uplift... Now, that's not going to go on forever.”at 17:06

Jim Bianco · Bianco Research, L.L.C.

Job growth near 60,000 a month is good, since breakeven is only about 35,000 as the working-age pool shrinks.

Payrolls rose 29,000 in September and have averaged about 60,000 a month this year. That looks weak against history, but Jim says the right benchmark is labor breakeven. Fertility has been below replacement since 2001, and illegal immigration has effectively stopped, so the 15-to-64 working-age population is shrinking. Breakeven job growth is therefore only about 35,000 a month. Unemployment is about 4.1 to 4.2%, and the four-week average of initial claims is 198,000, the lowest in 57 years. Those numbers look modest but are sufficient.

“Dare I say some pretty good numbers?”at 18:43

Jim Bianco · Bianco Research, L.L.C.

Near-zero illegal immigration and below-replacement fertility are shrinking the US working-age population.

Jim argues the US working-age population (ages 15 to 64) is shrinking. Fertility has been below the 2.1 replacement rate since 2001, and by 2030 more 64-year-olds will turn 65 than 14-year-olds turn 15. Immigration had been the offset: legal immigration runs about 600,000 a year, but illegal immigration, which ran in the millions under Biden, is now effectively zero. The shrinking pool lowers the job growth needed to hold employment steady, which is part of why modest payroll numbers still look adequate.

“illegal immigration, which was running in the millions during the Biden years, is now effectively zero.”at 18:43

Jim Bianco · Bianco Research, L.L.C.

AI displacement is very early, and will likely hit expensive mid-career workers more than entry-level hires.

Ramp data shows about 60% of companies spend on AI, but only 2 to 3% of companies say AI workflows meaningfully affect their bottom line; the rest are essentially paying for a basic cloud account. Jim says entry-level employment data is inconclusive. Recent graduates with non-STEM degrees are struggling, but that is a degree-mix problem, not clear AI displacement. He argues the real risk is higher up the employment stack: mid-career employees with 15 years at a company are expensive, while new graduates are cheap. If AI can handle a 40-year-old's job, that is where the pain will appear. He says the focus should move up the stack.

“So we're in very, very early days of AI being a potential displacement force in the economy.”at 22:07

Jim Bianco · Bianco Research, L.L.C.

Agentic AI that automates tasks, not chatbots, will transform work, but IT departments are restricting it.

Jim separates generative AI, which he calls a search engine on steroids, from agentic AI, which takes over computer tasks. He uses agentic tools to build Excel charts and slide decks by description, and his keyboard usage is down more than 50%. Very few people do this yet. Company IT departments restrict agentic tools because they fear bots getting into their servers and systems. Citing Andreessen's framing that a job is a series of tasks, he expects a revolution in how work is done once agents start automating tasks rather than just answering questions.

“once we get into the agentic side of the business and it starts to do the tasks as opposed to answering the questions, that's when you're really going to start to see the change in AI.”at 25:55

Jim Bianco · Bianco Research, L.L.C.

Small companies and startups can gain most from AI by automating back office work instead of hiring.

Jim says startups and small companies may have the advantage because they can start with AI agents doing back office, compliance and accounting work. Large companies have to displace existing employees, which is hard. Small companies just never hire the people they would otherwise need. He qualifies this for regulated fields such as financial services, where FINRA rules make it harder for a small firm to use AI and meet compliance requirements.

“so startup companies and small companies might have the advantage that we could get started. We can have AI agents and the like do our back office or compliance or accounting”at 31:07

Jim Bianco · Bianco Research, L.L.C.

FINRA's AI stance chills financial firms' AI adoption, and its rules favor large firms over small ones.

Jim summarizes FINRA's AI position as: use it, it's great, but if you put a customer at risk, we'll make you an example. He says this has a chilling effect, and that financial firms are being throttled in adopting AI, which he believes explains much of the industry's skepticism. He also argues FINRA's rules are built for firms with three floors of lawyers and compliance officers. A 10-person startup has to meet the same rules, which makes it harder to compete, and AI tools can only partly offset that.

“But if you ever screw up on that and you put a customer at risk or something else goes wrong, we're going to use you as an example.”at 31:07

Jim Bianco · Bianco Research, L.L.C.

The US is in a roughly 5.5% nominal growth world: about 3% inflation plus 2.5% real growth.

Bianco frames the economy as a nominal growth rate that equals real growth plus inflation. He has argued that the US is in a three-ish percent inflation world and a two-and-a-half-ish percent real growth world, which gives roughly 5.5% nominal growth. He rounds this to a 5-6% nominal economy. He stresses that he is talking about expected future growth rather than the previous twelve months. This framing underpins his view that current long yields are appropriate and no longer expensive.

“that we are in a three ish percent inflation world and a two and a half ish percent real growth world. That's a five and a half percent nominal world.”at 42:20

Jim Bianco · Bianco Research, L.L.C.

Policy rates near 0-1% would create malinvestment and inflation, as in the zero-rate era.

Bianco argues that too-low interest rates are as damaging as too-high ones. The price of money is the benchmark for every investment decision. In a 5% nominal economy, 1% money lets below-average investments show positive carry, which creates malinvestment. He cites 2010-2015, when zombie companies survived on cheap money and the economy saw a jobless recovery. Low rates eventually create speculative excess and inflation. He says the 2010-2020 period of zero and negative rates in Europe and Japan was the most abnormal stretch in interest rate history. He criticises the president's wish for rates between zero and 1% as a repeat of that mistake.

“One last thing. Everybody understands when interest rates go up, that's bad. But what I also argued is too low an interest rate is a problem for an economy as much as too high.”at 44:19

Jim Bianco · Bianco Research, L.L.C.

US debt is a real problem but not an acute emergency; total credit is unchanged at 369% of GDP.

Bianco uses a medical analogy. Elevated debt is like blood pressure slightly above the threshold: it needs attention, but it does not call for emergency treatment. He adds that federal debt alone (about $40 trillion) understates the picture. Including agency, municipal, corporate, foreign, mortgage and consumer debt, total US credit is 369% of GDP according to the Fed's Q2 flow of funds report. That ratio matched the 2006 level of about 3.6 times GDP. The mix has shifted from corporate debt toward government debt, and corporate deleveraging since 2008 has offset the rise. He argues the bigger issue is that the 2010-2020 zero-rate period anchored expectations.

“But I'm also not going to call an ambulance or rush you to the emergency room because of that. ... So let's deal with this problem. But it is not an acute emergency.”at 48:40