Home » Business

Bond Yields Slipping, How Long Can Inflation Be Transitory?

Published on

Since the big CPI and PPI prints earlier this week, markets have been trying to figure out direction and sentiment. What will be the outcome of continued higher inflation prints?

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2021 hedge fund letters, conferences and more

Capital markets seem to be a bit confused as to what to do next. As Federal Reserve Chair Powell testified in front of House and Senate committees over the last two days, there doesn’t seem to be any additional clarity in my eyes.

Higher Inflation Readings

I wanted to wait until the Fed’s 2-day testimony concluded before publishing today’s opinion piece to gain any additional clarity on the markets.

There is a conundrum that exists right now. We keep getting higher inflation readings, and the Fed has already telecasted that higher rates are in the cards in 2023 (maybe 2022). Inflation is a problem and needs to be tamed. One way of taming it is to raise interest rates. There are other tools at the Fed’s disposal to tame interest rates like tapering and more. The question becomes, at what point is action going to be taken?

As the Fed testified in Congress yesterday and today, interest rates fell and the price action seemed anything but typical following Wednesday’s poor 30-year bond auction. We get it, the markets are addicted to low interest rates, but unless hyperinflation is the goal, it feels like something needs to change soon. When will the Fed begin tapering bond buying? How about some incremental tapering or very fractional interest rate increases such as an eighth of a percentage point or something? If something doesn’t change soon, we could be heading for a 1981 style inflationary environment. Rates are going to have to rise, and the stock market is not going to like it. However, action needs to be taken.

Will the US equity markets be able to maintain their upward trajectory?

All of this stimulus, decade-plus near-zero interest rates, bond buying, and market addiction to easy monetary policy will have repercussions eventually.

Since we have been analyzing TLT, let’s take a look at the 30 Year Bond Futures:

Treasury Bond Futures

Figure 1 - U.S. Treasury Bond Futures July 8, 2021 - July 15, 2021, 1 Hour Candles Source stooq.com

Weak Demand In 30-Year Bond Auction

The puzzling price action (or perhaps not so puzzling in retrospect given the 2-day Fed testimony) is the creep higher after the weak demand shown in Wednesday’s 30-year bond auction. If you were short bonds at this time via TLT or any product, things were looking good. Since that auction, we had the Fed testimony, which showed many select congress members pleading for interest rates to be kept low. Unfortunately, if rates remain at rock bottom levels, it seems like inflation could spiral out of control. This continued inflation would be bad for the American people.

It is unusual price action; to say the least. The 30-year bond auction was priced at 2%, and demand was extraordinarily weak. There is a solid explanation of this most recent bond auction on Barrons.

However, today, we have 30-year bonds catching a bid near 1.94%. Yes, it is illogical. Yes, markets can be illogical for extended periods.

Looking at the 30-year bond from a perspective of yield:

Treasury Bond Futures

Figure 2 - U.S. 30 Year Treasury Bond Yield July 7, 2021 - July 15, 2021, 1 Hour Candles Source stooq.com

Fed’s James Bullard, Federal Reserve Bank of St. Louis President urged for tapering of bonds earlier today.

At the time of writing, we have the bonds continuing to be bid with the $SPX moving lower. The message of the market is exhibiting signs of change in my eyes. I don’t want to sound any overall warning bells just yet, but I am tuned in all day, every business day.

Now, let’s review the markets we are monitoring along with analyses on the other seven markets we are covering for Premium Subscribers.

Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter - it's absolutely free and if you don't like it, you can unsubscribe with just 2 clicks. If you sign up today, you'll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Rafael Zorabedian
Stock Trading Strategist

Sunshine Profits: Effective Investment through Diligence & Care

This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits' employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.