Stocks and bonds are at war over how much growth is coming under Trump

Bonds and stocks are at loggerheads again, with one side indicating caution on growth and the other brimming with optimism.

Judging by comments Treasury Secretary Steven Mnuchin made Thursday morning on CNBC, it looks like bonds could have it right — that growth is coming, but probably not as quickly as the stock market would like to think.

Mnuchin's boss, President Donald Trump, has been promising a pro-growth agenda fueled by tax cuts, less regulation and increased domestic government spending. From the time he was elected in November, the stock market took off, while government bond yields jumped as prices fell

But since then, stocks have continued to rise while yields actually have dipped a bit as fixed income investors have become less enthusiastic about how fast growth will happen.

"I think it's going to take time to get there," Mnuchin told CNBC in an exclusive interview Thursday morning. "By the time we pass tax reform, you see the impact on the economy, you see the impact of regulation, it's definitely going to take into next year to see an engine of growth."

The is up more than 10 percent since Trump's Nov. 8 victory, rising on the election, trading flat through much of December, then jumping again in the new year. The yield on the benchmark 10-year note immediately spiked as well, surging 38 percent to 2.6 percent by mid-December.

However, the yield, generally seen as a proxy for GDP growth plus the inflation rate, has fallen somewhat since then as fixed income investors have continued to buy government debt. Bonds often lose popularity during boom times, particularly if inflation sets in.

Investors in 2017 have pumped $52.3 billion into equity funds and $58.7 billion into bond funds, according to Bank of America Merrill Lynch.

"The bond market will eventually win this argument," Christopher Whalen, senior managing director at the Kroll Bond Rating Agency, said in a note to clients this week.

Whalen expects markets to come back to a belief that the growth expectations are overheated, with the result being the 10-year yield dropping further, all the way down to 2 percent. That will pose a dilemma for Federal Reserve policymakers who have indicated that three rate hikes are on the way this year.

Whalen considers the Fed's long-term rate expectations to be "not credible." Central bank officials recently discussed at length the effects of a pro-growth fiscal agenda in Washington, with some members indicating a faster pace of rate hikes could be warranted, according to minutes from the Jan. 31-Feb. 1 meeting.

Kroll "notes that the hunger for yield on the part of investors remains quite strong, while the credibility of the Trump White House in terms of ability to deliver on promised tax cuts and fiscal action is waning," he said.

For investors, the choices get complicated.

After all, during the same CNBC interview, Mnuchin said the public should look at the stock market as a referendum on the administration's economic policies.

So his cautionary tone about how quickly growth will accelerate also could be viewed as a warning about stock market exuberance.

"Hey, this guy is managing expectations. He's pushing back growth, and that's why we've actually been buying Treasurys," said Jack McIntyre, portfolio manager at Brandywine Global. "To us, there's an uncertainty over the sequencing of all this fiscal stimulus."

McIntyre also believes bond yields are likely to come down even more. Prices rise as yields fall, generating benefits for those buying fixed income for capital appreciation.

"A good politician manages expectations, and Trump is very good at that," he said. "That's a good reason to like bonds and not like the U.S. dollar."

There are other signs that investors are having some misgivings about growth.

Copper prices, which are seen as a reliable mirror of growth, tumbled about 3 percent Thursday after Mnuchin's comments. The metal, sometimes called "Dr. Copper" for its ability to signal the economy's direction, is up about 11 percent since the election but has fallen 4 percent since its mid-February peak.

Investors, then, are caught in a market that is expecting better things ahead, but with a timeframe that seems less certain.

"The truth is probably somewhere in between," said Cliff Corso, Insight Investment's CEO for North America. "Even though we think rates are going to rise modestly, it won't be a blowout."

For his clients, Corso is recommending a blend of strategies that includes stocks along with floating-rate and investment-grade bonds.