The 10-year Treasury yield could fall as low as 0.50% if the economy continues to grow at a lower-than-expected rate, which is increasingly likely as the spread of COVID-19 infections grows, according to economist and investment advisor Gary Shilling.
The 10-year Treasury was yielding 1.23% in midday trading Friday, down 24 basis points from a month ago.
"The risks are on the downside," Shilling, founder and president of A. Gary Shilling & Co., told ThinkAdvisor. "There has been too much enthusiasm based on the idea that consumers would be spending heavily."
But that hasn't happened, said Shilling, citing the decline in consumer spending after each of three successive federal government aid packages; a weaker-than-expected second-quarter GDP report showing a 6.5% annual growth rate versus expectations of 8%-9%; and a decline in new home sales.
Stronger economic growth is even less likely to happen now with the resurgence of coronavirus infections due to the more contagious delta variant, according to Shilling,
The Impact of the Delta Variant
"Everyone sort of assumed vaccinations would be the end of it," Shilling said, referring to the COVID-19 pandemic. Now, he writes in his latest Insights report, "renewed lockdowns are a threat" as the delta variant spreads and many remain unvaccinated. "Even without lockdowns I think there will be lot slower growth in the second half."
Coronavirus infections averaged over 71,000 on July 29, up 151% over the past two weeks, due largely to the spread of the delta variant with infections concentrated in states and counties with low vaccination rates. To date, 60% of the U.S. population over 18 years old is fully vaccinated, or 50% of the total population.
At its latest monetary policy meeting, the Federal Reserve generally agreed with Shilling's assessment of the U.S. economy.
"The path of the economy continues to depend on the course of the virus" and "progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy," the Federal Open Market Committee noted in its statement.
