Fundamentals that suggest the direction of long bond yields are falling into place to support higher
rates (and weaker bond prices). Cyclical factors turned weak in the latter portion of 2014 and
signaled the onset of a declining trend in the $TYX.
This year there have been upturns in the manufacturing PMI and in industrial commodities prices.
The recovery in the PMI has been modest with the exception of % of companies with a rising new
orders book, which has been strong.Weekly data on physical output is experiencing a mild positive
reversal and future inflation pressure gauges have been turning up after nearly 18 months of decline.
It is important to note however, that the mild upturns in cycle pressure are coming off a very
cyclically depressed base. My Cyclical Business Strength Index, which is a broad measure of the
components of production with heavy emphasis on plant utilization, reads a low 128. In the past,
when the economy was running flat out at effective capacity, the index could register up to 145
or over 13% above current levels. History also indicates that it was often only when the index
reached upwards of 135, that the Fed would turn aggressive in tightening monetary policy. So,
the current upturn is still well 'under the radar' when it comes to measuring cyclical pressure.
Bond traders operate on such a 'hair trigger' when it comes to dumping long maturities when
cycle pressures are on the rise, that it is interesting that the recent rally in bond prices has
continued even though pressures are inching ahead. Trader reluctance to reverse course may
well reflect a consensus conviction that faster output growth is not sustainable and that it is
not worth getting whipsawed in the process. Could be, but stronger data will likely dispel
consensus convictions in a hurry.
- 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 !!!