Yields exploded on the upside after the election
and has seen one of the largest routs in recent years, yet it would be wrong to
believe that this is all associated with the election. A close look at the
trend sin yields show that the market broke above moving averages at the end of
September. Using simple moving averages (20, 40, and 80-day), we would have
called a change in bond sentiment weeks ago.
All of the bond returns from the rally earlier in
the year have reversed. 2016 has become a tale of two markets. First, there was
a market driven by fears of low inflation and slower growth with a Fed cautious
about the economic environment. Second, there is a more confident Fed that
believes now is the time to act based on low unemployment and inflation approaching
or exceeding 2%, depending on the measure used.
Call it a normalization of bond risk premiums based
on new thinking of inflation. With long rates rising above short rates, term
premiums are increasing. Longer-term inflation expectations are rising albeit
to long-term policy expectations. Break-even rates are rising above last year,
but TIP's rates are increasing only slightly. This suggests that real rates may
not be focused yet on a change in economic growth trend. We are moving to an
environment that could be the new bond normal with risk premiums and inflation
expectations back.
No comments:
Post a Comment