Bond Market Agrees With Fed, Inflation Is Transitory

An opinion-ed piece by Ron Insana, Schroder's senior adviser, and CNBC contributor is saying that inflation may have already peaked. He wrote that the US bond market seems to agree with the Federal Reserve about the transitory nature of the ongoing inflation. 

RELATED: Powell Downplays Inflation Fears But Admits Uncertainty

Treasury Yield Drops

Insana noted the recent steep drop of 10-Treasury Yields, which went down to 1.25%, its lowest levels since February. He also said that global yields are falling down as well. These facts suggest one thing, inflation already reached its highest levels and will soon start dropping. At the same time, economic growth is also peaking here in the US and overseas as well. 

Both foreign and domestic investors are now balancing their portfolios by purchasing Treasuries Investors, of all stripes, foreign and domestic, are offsetting their exposure to global equities by purchasing high-quality Treasuries to provide ballast in their portfolios.

Economic Growth Slowing Down

The spread of the Delta variant of the coronavirus threatens to slow global economic growth. This is more likely if authorities will fail to control the spread of the newest and more transmissible strain. 

More to the point, peak inflation alone can explain the fall in Treasury Yield values. In fact, both five- and 10-year inflation “breakevens,” which are measures of inflation expectations, peaked on May 17. In addition, lumber prices are down 50% from their previous all-time highs earlier this year. At the same time, copper and other commodities prices also fell. 

Global Growth Uneven

Meanwhile, China started dumping various commodities to bring down prices of raw materials. The country also started tightening credit and making sweeping regulatory inspections on its local big businesses. These developments are also dampening economic growth. 

 tightening credit and hammering big businesses at home … not the stuff that global growth is made of.

Then, oil prices shot to three-year highs in recent weeks due to disagreements between OPEC members. Higher oil prices can raise inflation, though consumers often offset by using less gasoline by traveling lesser distances. Instead of bumping inflation, higher oil prices can slow economic growth directly. 

Bond Market Tantrum

Meanwhile, the bond market made a temporary disruption by going up to 1.8%. This produced a round of reactions among experts and economists that predicted a continued climb to 2% and beyond.

However, any fears of higher inflation rates quickly dissipated with news that President Joe Biden’s infrastructure program will now feature a lower price tag. This means that the government’s $6 trillion wish list will now come at a steep discount. 

This lends credibility to the transitory belief of the Federal Reserve. Even as many experts will point to rising inflation and interest rates, the market already shows that inflation is slowing down.

Coupled with the bond market’s implicit messaging, the reality of transitory inflation is finally making sense. The bond market is among the most sensitive ones worldwide, and it often figures out a shift even as others continue to see nothing.

Watch the Inside News’ video report that finds inflation as merely transitory:

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Do you agree that inflation is transitory? Is the Federal Reserve making sense now? Or, are we in for a world of hurt as inflation continues to grow.

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