Chart of the Week and Weekly Report Highlights
This week: Treasuries, TIPS and Inflation, Credit Spreads, EM Bonds, Global ex-US Equities, REIT sentiment & Flows, Asian currencies and EMFX
This email provides a look at what we covered in the latest Weekly Insights report
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Chart of the Week - Bond Yields and Inflation
Treasury Yields and the Long-Term Rate of Inflation: A lot of people have gotten excited about the surge in annual inflation rates, but in my view it’s arguably more interesting to look at the 10-year compound annual growth rate of CPI (long-term inflation rate) — particularly as it pertains to bond yields.
Typically bond yields follow the growth/inflation pulse, with a particular emphasis on growth in the shorter-term. But as we can see in the chart below, bond yields over the longer-term trace a fairly similar path to the longer-term rate of inflation.
Arguably the current move in bond yields has more to do with inflation than growth. Perhaps even to the extent that we could end up seeing growth momentum falter (as the leading indicators suggest), but still see bond yields move higher given the permanent bump to prices and lingering effects on the longer-term rate of inflation.
In terms of the “so what?“ — if we were to take this chart literally, US 10-year treasury yields would need to rise to around 4.5%+ to line up with the current and expected pace of this longer-term inflation rate…
Key point: With an increasing fixation on inflation bond yields could go higher yet.
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Topics covered in the latest Weekly Insights Report:
Treasuries: Looking oversold in the short-term, but not cheap yet.
TIPS: A look at where breakevens sit and the where-to-next.
Credit: Macro factors, value, technicals all suggest credit is on borrowed time.
EM Bonds: A very interesting corner of the market, and well worth watching.
Global ex-US Equities: Looking at the strategic vs tactical case.
REIT sentiment & Flows: Sentiment is souring on REITs (despite performance).
Asian Currencies & EMFX: Another wave of selling is hitting EMFX (Asia).
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