Are Bond Investors Wrong?

With soft demand for today's 30-year bond auction with yield to maturies coming in higher than expected, TLT has seen a massive move down (see chart below). I have talked previously about bonds not following the its normal historical relationships with stocks and commodities (inverse) and the US dollar (positive correlation). It seems as though bonds were rising only due to 1) too much liquidity finding higher yields than what money market is providing and 2) skepticism of the current equity and commodities market rally. It looks like bond investors are giving in to the pressures of a falling dollar and rising commodities and stocks. I don't have to tell you this over and over, but inflation is clearly in play.

Disclosure: None

Comments

[Larry House:]

Inflation is not in play. It may be anticipated, but it is not in play. I agree totally that we may face terrible inflation in a few years, but with 30% idle production capacity and 10% + in real unemployment, we do not face inflation---yet.

Oct 08 04:13 PM

[garyholl:]

Inflation is in play! Inflation is a monetary phenomenon, simply "too many dollars chasing too few goods and services" What in today's world refutes this basic law? Inflation will follow as surely as night follows day. The only question is how to deal with what is coming. I suggest debt (as in being in debt), hard assets (as in income producing real estate and income producing equities maybe), metals (gold and industrial metals), and agricultural commodities.

Oct 08 05:15 PM

[pemdas1:]

It is a common misconception that the Fed balance sheet expansion automatically leads to inflation. For inflation to occur banks and "shadow banks" need to lend this money, but they are not. Bank credit and commercial paper has fallen at a record rate, and hundreds of lending institutions are either bankrupt or on life support.

Capacity utilization is at a record low, unemployment is rising, and wages are falling. If you see inflation in this picture you are a general fighting the last war. We will get inflation eventually, but it is much farther off than most people seem to expect.

Oct 08 08:02 PM

[writejesse:]

Inflation dead? Hardly. See inflationwatch.wordpre... for examples of recent price increases.

Oct 08 10:38 PM

[tripleblack:]

Inflation is also more of a global phenomenon now than ever before.

We have a much larger percentage of our economy exposed to what happens globally, and this can work to our good or our ill.

So long as a huge chunk of our trade is done in dollar-denominated goods (oil, commodities of all kinds) OR with trading partners whose currency has depreciated at a rate similar to ours (much of the world has experienced this recently, for reasons similar to ours) OR with countries that actually peg their currency to the dollar (China), these things will lessen the surge of inflation.

Also, when the world's financial system moves in tandem, coordinating interest rates (for instance), inflation can also be reduced.

As these factors fall away (which we read about constantly nowadays), inflation will result.

Larry is correct about the effects of damming up liquidity inside the banking system - with no signs of this logjam breaking up anytime soon, the chances for inflation are pretty slim. If anything, I suspect the politicians would like to see a little more inflation, and a lot less constipation in the banks.

I wonder if they have learned anything from this experience, though. The idea of just pouring money into a dollar carry trade or the black hole of terrorized banks afraid to make a loan and content to earn a tiny (but free) income from their piece of the liquid largesse just has not worked out in that regard.

Oct 08 11:02 PM

[stocknerd:]

Inflation? Bring it on. Let's pay off some of that old debt with fresh crisp, loose money. Yea baby! But seriously folks... The above posters are correct: What inflation? We are still in the black hole of a recession and inflation is still next year at the earliest, if ever. Remember our good buddies over at the Federal Reserve will raise interest rates in a flash. All you, no offense, TBT, TLT holders betting on the END OF THE WORLD SCENARIOS, well, you are holding dead money until it (if ever) happens. Note: Never bet with the end of the world scenarios like inflation will collapse the world's economy. It is silly. Now back to the show.

Oct 09 09:17 AM