Soaring inflation creates headwind for long bonds
The following chart of the US 10-year Treasury Note yield indicates that we have now arrived at an important point of resolve regarding an upward break of both the trendline and 50-day moving average:
Whereas safe-haven buying has driven long bond yields sharply lower ever since the advent of the sub-prime crisis, investors now seem to have started focusing more strongly on the inflation outlook rather than on economic growth considerations. And rightly so, as the latest batch of statistics points to rising inflation around the globe.
It would appear that financial markets currently face three potential price pressures, as succinctly summarized by GaveKal:
“1. Soaring food and energy prices
Meanwhile, oil reached yet another record high yesterday, closing at US$113.8/barrel. On that topic, we note with some concern that … world expenditure on oil, as a percentage of global GDP, is back to 7% – a level not seen since 1980. Given the severity of the global recession that followed in the early 80s, this data point does not instil confidence.
2. Rising export prices from Asia
3. Excessive monetary easing by central banks
Although long bond yields may not yet skyrocket given the poor economic outlook, it seems prudent not to be exposed to an investment that will by definition lock in an unattractive total return of 3.7% over the next 10 years. As a matter of fact, it may not be a bad proposition to buy a few out-of-the-money put options on long-dated bonds.
More on this topic (What's this?)
Dividend Growth Stocks Protect Investors from Inflation (Dividend Growth Investor, 7/29/15)
Global Government Bonds Sell Off; Yields Hit 2015 Highs (Jutia Group, 6/12/15)
6 comments to Soaring inflation creates headwind for long bonds
Performance Optimization WordPress Plugins by W3 EDGE