Bond yields carry a big clue to inflation

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Former Chase Chief Economist Anthony Chan at the Federal Reserve and President Biden’s claim that spending money will adjust inflation.

Bearish bond yields are likely to decline as the market approaches the latest bout of inflation is transient, according to Wall Street strategists.

On Monday, the 10-year Treasury yield fell 12 basis points to 1.18%, the lowest since Feb. 11. With the decline, the benchmark yield has fallen 59 basis points since it peaked on March 31.

“The yield on the 10-year paper has fallen below the 200-day moving average in the past 24 hours like a hot knife through butter,” wrote David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research. “There’s nothing but dead air down 1.0% on the charts.”

Source: Tradeweb ICE Close, Dow Jones Market Data

What started as a steady decline in yields has accelerated in recent weeks as the bond market has come to accept the idea that the Federal Reserve will not need to be as aggressive as it initially thought.

Market expectations for the Fed’s first rate hike continue to be delayed, and four rate hikes, or 100 basis points of tightening, have been removed from Treasury pricing since April, according to Rosenberg.

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That’s because the 5-year and 5-year rates, the Fed’s preferred measure of inflation expectations, have fallen to 2% from their recent high of around 2.5%, a sign that the recent rise in prices for some goods and services is temporary, as suggested by the bank. central.

The CPI rose 5.4% annually in June, the largest rise since August 2008. The price jumped 0.9% month over month, also the fastest in nearly 13 years.

Price gains were significantly skewed by a 10.5% increase in used car and truck prices. Already, these prices are beginning to fall at the wholesale level, which should appear in the next few weeks in consumer prices.

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Federal Reserve Chairman Jerome Powell described the issue as a “perfect storm of very strong demand and limited supply” and said the price gains were temporary but he wasn’t sure when they might reverse.

In this Tuesday, December 1, 2020, file photo, Federal Reserve Chairman Jerome Powell, right, testifies before the Senate Banking Committee on Capitol Hill in Washington. (AP Photo/Susan Walsh, Pool, File) (AP Newsroom)

The used car market has seen an increase in demand as supply chain disruptions caused by COVID-19 have hampered chip production, causing automakers to slow production.

In the near term, supply chain disruptions aren’t the only problem markets have to deal with. Traders must also overcome a slight rise in COVID-19 cases due to the delta variable and the ongoing financial drama on Capitol Hill

All of this should lead to a risk-free environment that pushes bond yields lower, according to Alex Bailey, US economist at Mizuho Securities USA.

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However, he warns that returns are eventually trending higher.

“Additional fiscal policy should lead to higher relative growth in the US and inflation in the medium term along with a more cautious Fed,” Bailey said. “The net result should be a re-slope of the Treasury curve.”

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