What Are Yields Telling Us About Inflation

June 14, 2021  |  Michael Reilly

We all know that Washington plans to spend their way out of this COVID hangover. And the more money they print the higher inflation ultimately should be – right? 

Just last week we saw historic readings in the Consumer Price Index (CPI). Yet yields pointing lower! 

Check out these important ratio charts below.

If inflation is really going to be the long-term threat many in the media would have you believe- then why are yields on the 10yr Treasury falling, rather than rising? 

I don’t have a clear answer to share, but you can bet I’ll be watching yields closely for any further developments.

And what about this chart comparing High Yield Bonds vs. 3-7 yr T-Bonds (HYG:IEI).

The spread between High Yield Bonds and Treasury Bonds seems to be shifting to a more bearish tilt for risk assets. If we are to believe this is indeed a risk on-right now market, this ratio should be widening. At best, it looks indecisive.

And the Regional Bank/REIT ratios have been pointing down for some time.

This is a market of mixed messages. We just saw blow-out CPI numbers and witnessed the CRB commodities break out of above an important down trendline, while Crude Oil finally broke out above $70 a barrel,  yet the Bond market doesn’t seem to be in the camp that inflation is here to stay. 

Although there’s no clear directional bet today, the information above is still very useful. The message is clear, in that investors must be on guard for the possible implications of lower long-term inflation and what that means to your investment thesis.

And I wouldn’t discount the Bond markets actions here, as the Bond market is considered smart money.  So, stay tuned…

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