Bond prices have rallied nominally off last week’s lows as the 10-year has slipped in yield by about 10 basis points.  Some are questioning why the advance as the data is convincingly strong.  I believe it is for a myriad of reasons.  First nothing ever moves linear.  There is always backing and filling.  Second the Fed is continuing to make reassuring commentary.  Third lack of supply.  Fourth the lack of inflationary data.

Will the environment change next week?  There is the resumption of Treasury issuance as the three-year, 10-year and 30-year will be auctioned.  Will the curve steepen in the face of increased supply?

Perhaps just as important as the auctions, March CPI is released.  The data is likely to push inflation above the entire term structure of the Treasury yield curve, a very rare occurrence.

Price stability has been a Fed dictum for almost forever.  We have had price stability for the last 12 years and many are bemoaning such.  Wage increases are tied to some inflationary index and if prices are flat, automatic wage increases based on inflation will also be flat.

Bloomberg writes the economy has not experienced a CPI reading two standard deviations above or below the 10-year average inflation rate since 2009, the third longest streak over the last 120 years.  The last such occurrence when there were so few inflation observations of more than one standard deviations from the average was the 1950s and 1960s, the last era when low cost providers entered the global system.

As noted above, next week the CPI is released and the headline rate is expected to be 0.9 standard deviations above the 20-year average.  Treasury yields across the entire spectrum will be below the inflation rate across the entire spectrum, a third standard deviation event.

Historically when such occurs, Treasuries rise in yields and equities decline anywhere from 5% to 20%, depending upon the depth of the decline in Treasury prices.

Many believe (hoping) the Fed’s inflation forecast is accurate and such increases are indeed transitory for if they are not history suggests volatility will sharply rise.

Commenting about yesterday’s market activity, the NASDAQ rose about 0.9% and the Dow was flat on the FRB Chair’s reassuring inflation remarks.  Treasury prices were moderately higher, a possible catalyst for the NASDAQ advance.

Last night the foreign markets were mixed.  London was down 0.13%, Paris up 0.24% and Frankfurt up 0.07%.  China was down 0.92%, Japan up 0.20% and Hang Seng down 1.07%.

The Dow should open mixed ahead of the PPI.  The 10-year is off 12/32 to yield 1.67%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.