The bond markets have experienced a hiccup in the first part of this year, with the 10-year bond rising 45 basis points in yield, to 2.85% from 2.40%, and the 30-year bond rising 37 basis points in yield, to 3.11% from 2.74%. Our feeling is that these yields are rising in one measure to compete with the blistering start to the stock market (which itself has seen bouts of volatility in the past week).
It is ironic that in Janet Yellen’s last week as chair of the Federal Reserve Board, a bond market that had focused on low economic growth and stubbornly low inflation was suddenly concerned about too fast a growth rate and inflation’s heating up.
Core CPI
Source: Bloomberg
However, core CPI is still well below where it was in 2016 at the time of Trump’s election. There has been some growth in wage inflation, but it is clear that so far it has not leaked over into the general inflation numbers.
Ten-Year Treasury Yield vs. Core CPI – Last Two Years
Source: Bloomberg
The spread between the 10-year Treasury bond yield and core CPI has risen sharply. There is a certain amount of logic in real yields rising relative to the jump in equities over the past year. This increase in yields reflects in part a continuation on the path to normalcy: This is the Fed continuing to slowly raise short-term interest rates and starting to shrink its balance sheet. (See my colleague David Kotok’s piece this week: Market Violence & Interest Rates). David’s point is that a 3% 10-year Treasury note yield is not a shocking development.
Ten-Year Treasury Yield vs. Core CPI – Last Five Years
Source: Bloomberg
The bond market’s rise in yields has occurred without an accompanying jump in inflation. In the context of REAL yields, we can see in the above graph that bond market yields compared to core inflation are back near levels that we last saw at the end of the “Taper Tantrum” of 2013. Bond yields may move higher; but if they do, they will start to represent value.
Leave A Comment