Why are bond yields falling, if the U.S. economy is growing?
That's a good question. It's important to note that there are two important economic components that get baked into bond yields... inflation and growth expectations. We have been arguing for some time now that inflation will fall (see our #Reflation'sRollover theme).
And just like that, inflation has been falling...
The Fed’s 5-year-5-year forward breakeven inflation rate (a measure created to estimate the market's inflation expectations component embedded in Treasury bonds) has retreated 20 basis points off the year-to-date highs in March. So it makes sense that in the past three months, the 10-year Treasury yield has fallen from 2.63% to 2.16%.
All of this was deducible by reading the economic tea leaves. Our Growth, Inflation, Policy (GIP) model, a proprietary tracking algorithm of 30 high-frequency economic indicators, has suggested for some time now that the U.S. economy is headed for Quad 1 (that’s when U.S. growth is heating up and inflation is cooling down).
On the bond yield front, falling price inflation has simply overwhelmed the U.S. #GrowthAccelerating narrative for now. As Hedgeye Macro analyst Ben Ryan writes in today's Early Look look no further than the performance of long-dated Treasury bonds (TLT) versus Treasury bonds corrected for the current rate of inflation or TIPs:
"In today’s Chart of the Day, we show the performance of a TLT/TIP ratio index YTD. This ratio index represents the performance of long-duration treasuries (TLT) relative to Treasury-inflation protected securities (TIP). The ratio index only slightly lags the performance of TLT YTD with reflation’s rollover the “divergence” factor. TLT is +5.3% with the TLT/TIP ratio index +4.0% YTD (+1.3% for TIP)."
Keep an eye on this trend. For more, below is a video with Hedgeye U.S. Macro analyst Christian Drake digging into our #Reflation'sRollover theme in more detail.
