Keeping Track of Inflation Expectations: 12/09/2016
Inflation expectations are a leading indicator of Treasury Yields, which impact investors principal investments that are particularly inversely correlated.
Stronger than expected Chinese inflation data and the lingering impact of the European Central Bank's decision to reduce the size of its monthly bond purchases starting in April helped drive a selloff in global fixed-income markets on Friday.
Chinese data released Tuesday showed that consumer and wholesale price-growth accelerated at a faster than expected pace last month. Because China is the world's second-largest economy, the rise portends a pickup in global inflation expectations.
The Treasury market is a touch weaker overnight, a move that is being attributed to higher-than-expected Chinese inflation data that set a bearish tone early in Asian trading hours," said Ian Lyngen and Aaron Kohli, a team of fixed income strategists at BMO Capital Markets, in a research note published Friday.
The yield on the 10-year note TMUBMUSD10Y, +2.35% rose 7.1 basis points to 2.462%, while the two-year yield TMUBMUSD02Y, +2.95% climbed 2.5 basis points to 1.132%. The 30-year TMUBMUSD30Y, +1.36% rose 9.2 basis points to 3.155%. Bond yields move inversely to prices.
Global inflation expectations have improved dramatically since U.S. President-elect Donald Trump upset Democrat Hillary Clinton in the Nov. 8 U.S. presidential election, sparking a global bond-market rout that has stretched to a fifth week. Investors believe that Trump's proposed fiscal policies, including massive tax cuts and a $1 trillion infrastructure spending plan, would drive up wages, leading to higher consumer prices.
Below is a 5 year weekly (yield) chart of the UST10Y. I struck a pink line across resistance level going back to July 2015. If 10Y's do break out we could be looking at 3% +/- (see right axis).
Watch your eREITS, long duration bonds, baby bonds, preferred stocks, exchange traded debt; they are highly inversely correlated to rising yields.
Source: Td Ameritrade
Below is a price chart of the ETF: IEF (7-10 year U.S. Treasury Bond). I struck a support line (pink line) around 103.50. I expect price to pause there for a while, probably a reversal to the upside. Price is well below the the bottom yellow line which is 2 standard deviations away from the average price. Usually a security moves back into the channel (between the yellow lines) because it is statistically significant.
Source: Td Ameritrade
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Disclaimer: This article is informational. I have no knowledge of individual investor circumstances, goals, portfolio diversification, etc., readers are expected to complete their own due diligence before making investments.