The charts show how all stock indexes, especially the NAZ, have fallen since the beginning of 2022.
The more striking movement is the bond yields. They are responding to the Fed as expected.
Notice how the 2 year-10 year spread has narrowed. The only thing that is keeping the yield curve with a positive slope is the Fed’s pinning the short end to zero. Otherwise, it’s flattening and could invert. That’s often a prelude to recession.
Notice how the 2 year-10 year spread has narrowed. The only thing that is keeping the yield curve with a positive slope is the Fed’s pinning the short end to zero.
If the long end of the curve isn’t moving much then does that mean the expectations for inflation are (relatively) short term?
For example, looking at the 1964-69 period, inflation went from 1% up to 6%.
10-year Treasury rates also rose, going from 4% to over 6%.
<If the long end of the curve isn’t moving much then does that mean the expectations for inflation are (relatively) short term?
For example, looking at the 1964-69 period, inflation went from 1% up to 6%.>
The bond market in 1964-69 was free and not controlled by the Federal Reserve as it is now. At that time, the bond market truly reflected inflation expectations.
Currently, the Fed buys 25% of TIPS, which are often used to calculate “inflation expectations.” (Treasury minus TIPS = inflation expectation). The market for TIPS is much smaller than the market for Treasuries so the Fed can manipulate the TIPS price to get the result they want.
When Fed Chair Powell said that he wanted the Fed to let inflation rise above its 2% target temporarily, I said to myself, “Watch out what you wish for. Inflation isn’t easily tamed once it gets going.”
As of yesterday, the 10YT real yield was the same as the 10Y TIPS yield = -0.50%. If they got too far apart they could be arbitraged. I’m sure that the Fed is controlling this. They wouldn’t want the markets to see that long-term inflation expectations were rising if that were the case.
Anyone who thinks that inflation will rise long-term should buy TIPS. But the better choice is I-Bonds since the principal of TIPS will decline if interest rates rise and the bond is traded before maturity.