the rise in treasury yields slowed this week, highlighting skepticism in some quarters that donald trump <u+2019>s presidency will usher in a period of rising inflation. the yield on the 10-year treasury note, which falls as prices increase, fell wednesday, following a muted rise on tuesday, while the 30-year bond yield fell both tuesday and wednesday. yields had surged since the u.s. presidential election on the view that mr. trump<u+2019>s tenure will generate a period of rising inflation, as he pursues policies such as tax cuts, regulatory rollbacks and infrastructure spending to boost economic growth. market-based inflation indicators were rising before mr. trump<u+2019>s victory last week, following sharp declines earlier in 2016. but some investors say factors including the size of the u.s. debt load could limit the effectiveness of any fiscal-stimulus efforts. the more debt that is outstanding, the less bang for any given dollar of spending, some say. these skeptics insist the bond selloff has gone too far. <u+201c>i was rolling my eyes so many times in the past few days that i thought i was going to go blind,<u+201d> said david rosenberg, chief economist and market strategist at gluskin sheff & associates inc. <u+201c>the inflationistas have a lot to account for because history is not on their side.<u+201d> other quarrels with the pro-inflation narrative focus on the numerous premature inflation calls of the past decade. some economists and businessmen wrote an open letter in 2010 warning then-federal reserve chairman ben bernanke that monetary stimulus would have inflationary consequences, a view that now seems thoroughly discredited. inflation has failed to hit the federal reserve<u+2019>s 2% annual target for more than four years. the u.s. producer-price index for final demand, a measure of business prices, held flat in october compared with the prior month, data showed wednesday. prices were up 0.8% from a year earlier. lacy hunt, executive vice president at hoisington investment management co. in austin, texas, has long invested his fund in treasurys with faraway maturities, reasoning that the economy is too weak to generate inflation that would erode the gains on those securities. since the election, he has been bombarded with calls from clients wondering whether the bond selloff is the death knell for the bond rally that began in 1981. on wednesday, the 30-year yield fell to 2.925%, while the 10-year yield fell to 2.222%. a bond-market gauge that compares nominal treasury yields with inflation-protected counterparts forecasts that inflation will climb at 1.88% annually over the next 10 years, up from 1.4% in july, according to tradeweb. mr. hunt<u+2019>s answer: no way. <u+201c>there is always this rush to judgment when there<u+2019>s a major policy change,<u+201d> he said. he is investing new client money in long-term treasurys, those maturing in 10 years or more. one reason he thinks inflation is set to stay low is the nation<u+2019>s $19.8 trillion debt load. the increase in debt stands to make each dollar go less far in spurring growth, he said. from 1952 to 1999, it took about $1.70 in nonfinancial debt for gross domestic product to expand by $1. in the year through june, it took $4.90 to do the same. the national debt could increase $5.3 trillion over a decade should mr. trump cut taxes and boost spending as he has said during the campaign, according to the nonpartisan committee for a responsible federal budget. even after stimulus projects are completed, their impact on inflation isn<u+2019>t necessarily positive. improving roads and rails to make transportation more efficient can actually cut per-unit costs, mr. rosenberg said. he cited the new deal package in the 1930s and the highway-construction spending of the 1950s as big stimulus measures that didn<u+2019>t in their own right boost prices. still, many investors think inflation is headed higher as part of a broader economic reckoning. prices had been rising in the months before the election, and a policy pivot could boost that, some say. market factors like higher interest rates and a stronger dollar also may have a damping effect on inflation because they can restrain the economy. <u+201c>there is a good chance that we are at one of those major reversals that last a decade,<u+201d> ray dalio, chairman and chief investment officer at bridgewater associates, said in a linkedin post tuesday. he suggested inflation was set to climb. even those who don<u+2019>t see inflation in the cards suggest that some elements of mr. trump<u+2019>s policy proposals may work toward that purpose, such as his vow to cut the corporate tax rate to 15% from 35%. yet the experience of tax cuts during president ronald reagan<u+2019>s administration suggests this took a long time to filter through to the economy, mr. hunt said. write to ben eisen at ben.eisen@wsj.com
the $19.8 trillion hurdle facing higher u.s. inflation - wsj
ben eisen