Bonds are talking to us after inflation gauge comes in above forecasts
Bonds are talking to us after inflation gauge comes in above forecasts
Stock markets sank after Wednesday’s inflation numbers were released. And that tells us something. You know what might tell us even more? Bonds.
The yield on the 10-year Treasury note spiked right after the consumer price index came out, showing that prices rose slightly more than forecast in March. Same thing for the two-year. Yes, the bond market is talking to us. What is it saying exactly?
If you’re gonna lock your money up in a 10-year bond, you obviously want it to be worth it for all 10 years. Which means that the yield on a 10-year bond tries to account not just for what interest rates are, but what they will be. So if there are high interest rates in our future, bonds theoretically reflect that.
“I think that’s what we’re seeing on bond markets today,” said Eric Winograd, chief economist at AllianceBernstein.
Bond yields went up Wednesday, perhaps showing us our future like a crystal ball. Three-month bonds predict three months of future, two-year bonds cover two years.
“Short-dated bond yields are moving higher. Longer-dated bond yields are also moving higher, not by as much,” Winograd said.
Investors generally believe inflation will continue to come down, but not as fast as they had hoped. Which means the Federal Reserve will probably keep interest rates high to fight that inflation.
What makes this worse is that high interest rates aren’t even that helpful for the kind of inflation we’re seeing, said Rick Rieder, chief investment officer for fixed income at BlackRock.
“Auto insurance, health insurance, health care costs, education tuition, those things generally don’t move based on interest rates,” he said.
This kind of inflation is like the antibiotic-resistant bacteria of the econ world.
“The only way you really bring them down is you’d have to really have pressure on the economy,” Rieder said. Unfortunately for the economy, “you’re seeing credit card charge-offs, auto loan delinquencies growing, nonmortgage interest payments moving up significantly.”
Now, one thing about crystal balls in, like, the movies is they’re right. But the market crystal ball changes its mind, basically, constantly.
“If you look at the bond market today, clearly we see a big reaction, and in our opinion it’s a little bit of an overreaction,” said Tuan Nguyen, an economist for RSM.
Nguyen said he thinks falling housing costs will pull down inflation by the summer, so things could improve more quickly than the market’s crystal ball thinks.
But really, maybe it’s not a crystal ball. Maybe it’s more like tarot cards — or a Rorschach test.
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