Treasury yield curve and inflation expectations look lousy

Treasury yield curve and inflation expectations look lousy and the stock market continues higher.

The narrative around inflation is a hot topic on Wall Street and Washington these days. From the markets perspective, we are in the beginning stages of a tightening cycle. Surely, some will argue the Fed decision to taper yesterday is not monetary tightening, but the yield curve says otherwise.

What is the treasury market saying?

In short, a lot! Take a look below.

Notice the change from Nov. 2019 and 2020. From my vantage point I see a failure in Yield Curve Control (YCC) in the middle of the curve, namely between 2year and 7year treasuries. At a point in time Central Bank policies were in control and held down rates out 7 years. Not anymore! This is a big moment for the markets. To be sure, digesting the fact that inflation is NOT transitory and pivoting to a hawkish monetary policy is in the cards. Also, the blowout of Aussie yields and the U-turn monetary policy might be a sign of things to come.

Conclusion

By and large equities have been the best hedge against inflation over the long-term. Due to interest rates being pinned near zero and stock dividends the new source of fixed income for investors, I expect the bull market in equities to continue.

On a side note, I keep wondering how the narrative will change in inflation actually turns out to be transitory by Q1 2022. What would stocks and rates do then?

My post yesterday noting the collapse in oil prices not being followed by energy stocks helps strengthen the inflation is not transitory narrative and provides anecdotal evidence of the strength of underlying price pressures. Today the energy market is on fire.

–

DISCLAIMER: Content provided in this document is for your informational and entertainment purposes only. This document is not a solicitation for an investment, is not comprehensive, and should not for the basis for any investment decision. This document is not an offer to sell or a solicitation of an offer to buy any securities, commodities, or financial instruments, and my not be relied upon in connection with the purchase and sale of any instruments or interests in investment vehicles. This document should not replace professional investment advice based upon your particular situation. Duties are not assumed, intended or created by this document.

Mikehoganonline (“MHO”) strongly suggests that you obtain independent advice in relation to any investment, and with respect to any financial, legal, tax, accounting or regulatory issues resulting form such an investment. In addition, because this document is only a high-level summary: it does not contain all materials terms pertinent to an investment decision. This document should not form the basis for any investment decision. Information contained in this document has been obtained from sources that MHO believes to be reliable, however MHO make no assurance or guarantee that such information is true and/or accurate, and MHO expressly disclaims liability arising form the use of information contained herein.

This document contains statements of opinion. These statements of opinion include, but are not limited to, MHO’s analysis and views with respect to: digital assets, projected inflation, macroeconomic policy, the market adoption of digital assets (including Bitcoin and Ethereum, and Blockchain), technical and fundamental analysis, financial planning, and the market in general. Statements of opinion herein have been formulated using MHO’s experience, research, and/or analysis, however, such statements also contain elements of subjectivity and are often subjective in nature. In addition, when conducting the analyses on which it bases statements of opinion, MHO has incorporated assumptions, which in some cases may prove to be inaccurate in the future, including in certain material aspects. These analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing in this documents represents a guarantee of any future outcome, or any representation or warranty as to future performance of any financial instruments, credit, currency rate, digital currency or other market or economic measure. Information provided reflects MHO’s views as of the date of this document and are subject to change without notice. MHO is under no obligation to update this document, notify any recipients, or re-publish the content contained herein in the event that nay factual assertions, assumptions, forward-looking statements, or opinions are subsequently shown to be inaccurate.