Long-end bond yields are lower and the front-end higher once again this morning as the US Treasury yield curve continues to confound by flattening. Bloomberg macro strategist Mark Cudmore suspects there is more to come… for one simple reason, so often overlooked…
Via Bloomberg,
Cheaper eats are great, but maybe not if you’re one of the many expecting a sustainable bump in bond yields next year.
Falling food prices risk wrecking the forecasts — seen pretty much every December for years now — for yields to climb in the new year. Ten-year Treasury rates haven’t closed a year above 2.45 percent since 2013.
Bond bears seem to struggle to incorporate structural disinflationary pressures that have come from technology and globalization.
The Bloomberg Agriculture Subindex on Monday hit its lowest level since the series began in 1991. Technology and science are making the agriculture industry increasingly efficient, and there are still plenty of production gains to be made globally.
Combined with the overhang of energy supply that’s capping oil prices — and therefore processing, transport and distribution costs — that means the long-term trend remains one of cheaper food prices.
And food prices are a key component of consumer price index baskets around the world.
The impact is global, real and seems to be constantly underestimated.
Since Saturday, China, Denmark, Norway and the Czech Republic have all released CPI prints where the annual rate was both decelerating and below expectations. Food prices were specifically cited in China’s case.
None of this is to argue that bond yields can’t spike higher for short periods, notes Cudmore, but it’s just an argument to highlight that structural disinflationary pressures from technology remain strong and shouldn’t be dismissed.
With several major central banks indicating that the marginal bias is to tighten policy, that will further crimp price rises. And that doesn’t bode well for a sustainable broad rise in developed-market yields.
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