As I mentioned in the 2/9 post, I use a momentum indicator based on
the $ cost of industrial commodities production (6 mos. Ann./rate). I
long ago rolled this into a much broader macro measure and use the
latter, broad measure as a long Treasury direction measure as well.
Both guides are trending up, but momentum is slowing because
both industrial commodities and the broader CRB index have lost
Interestingly, since 2004, the Treasury market has been less
sensitive to upsurges in the CRB commodities index as well as the
CPI. My guess here is that the Treasury market players regard a
fast rise in oil, petrol and natural gas prices as a tax on consumption,
figuring that it will penalize real incomes and confidence and thus
bring about slower real economic growth. This could be an instance of
a broader issue, namely that an acceleration of inflation which quickly
outstrips wage growth will eventually punish the economy, not to
mention force the Fed into tightening moves. So, in deciding about
the merits of the bond market, you may have to study the inflation
drivers and not just the CPI overall.
I also plan to watch the Treasury yield more closely compared to the
momentum of the leading indicators, since bond players clearly
now figure that once growth momentum fades, inflation pressures will
abate and the Fed may ease credit. Leading indicator momentum
here (Scroll down).
In summary on this point, bond players now regard inflation as both
limited and cyclical. That could all change in the future, but you will
need evidence which contradicts first.
The long Treasury yield has taken off rapidly against a ZIRP for
short rates. Bond players are figuring that sooner or later, the Fed
will push up rates as economic recovery proceeds and are not
waiting. By super long term historic standards of positively shaped
yield curves, a 4.60% long term Treasury implies a 3.0% 91 day
T-bill. Here, it is possble that once short rates lift, the Treasury
yield may exhibit below average sensitivity to it. Something to
consider. You also have to keep in mind that if economic momentum
slows during the ZIRP interval for short rates, bond traders could
anticipate a fast long side trade with Treasuries, reasoning that less
monetary accomodation will be postponed.
It is possible that with the large budget deficits on tap ahead, the
Treasury yield could develop a "supply premium" as investors
demand a higher yield in lieu of upcoming heavy new issue volume.
Too early to tell on this I think.
Bond analysis has become more complicated and dynamic, but I
think it is still manageable. I hope these additional comments prove
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!