What Is Bond Market Signaling?

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Includes: IEF, SHY, TIP, TLT
by: The Macro Trader

One of the strongest inflation/deflation indicators is the bond market. When inflation is expected to be high yields tend to go up and when the market expects deflation/disinflation yields tend to be low. So what are the markets telling us right now?

First let's look at the two year yield. After all, if hyperinflation is right around the corner it would make sense that we might see some of that in the short end of the curve. As you can see in the chart below the 2-Year is not signaling higher inflation anytime soon.

2-Year Treasury Yield

2-year-yield1

(Click to enlarge)

Maybe looking at the long end of the yield curve would give a signal. After all, if gold is climbing, inflation must be almost here, right? Looking at the chart it would appear as though the market is not expecting much.

30-Year Treasury Yield

30-yr-yield

(Click to enlarge)

Let's give this all one more chance. What are TIPS showing us? Surely if hyper inflation is upon us, inflation protected bonds would give us a sign. Looking at the 10-Year breakeven rate it appears as though inflation expectations are in fact dropping instead of rising.

10-Year Breakeven Rate

10-year-be

(Click to enlarge)

Apparently many investors are reading things a bit wrong. Gold is not going higher due to fears of imminent inflation. Right now gold is almost purely a currency trade . With the problems in Europe, investors are scared of government and instead have been going to the shiny stuff as a perceived safe asset.

Inflation will come at some point down the road but it is not right around the corner. Whether you are looking at bond yields, commodity prices, the CPI, housing, or Fed statements, we are seeing the same signals, and they are almost all pointing towards deflation/disinflation and not inflation.

Disclosure: No positions