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Bonds, Gold, Inflation


Chief Strategist at Interactive Brokers

The headline that caught my attention this morning was not about meme stocks for a change.  It was that the 10-year Treasury yield had slipped below 1.50%.  It was counterintuitive, since the headline that caught my eye before I went to sleep was about higher than expected inflation in China.  Treasury bond prices are supposed to represent traders’ expectations of future inflation, since they are perceived to be devoid of credit risk.  Why have bond yields fallen (prices risen) in the face of higher inflation?

As we have done before, we will use charts to tell much of the story.  Consider the following:

CRB Index (white) vs. Generic US 10-Year Note Yield (orange), 1 Year

CRB Index (white) vs. Generic US 10-Year Note Yield (orange), 1 Year

Source: Bloomberg

We can see that for most of the past year, the 10 year yield has moved higher roughly in tandem with the CRB Index.  In March, however, bond yields suddenly accelerated.  I believe that the upcoming end of the 1st quarter had much to do with it.  Bond prices had already fallen sharply, and it is reasonable to believe that there was a rush to the exits.  The decline in yields in April and May brought yields back toward the shared trend.  I don’t think it’s a coincidence that we are seeing an acceleration in bond prices 3 weeks from the end of the 2nd quarter.  Just as traders seized upon a trend 3 months ago, I believe they have the same thought process this month – though in the opposite direction.  I assert that bonds are still generally following the path of higher commodity price inflation, but prone to overshooting the year-long trend to the up and down sides.

We see gold also “sort of” following commodity price inflation evidenced in the chart below:

CRB Index (white) vs. SPDR Gold Shares (GLD, orange), 1 Year

CRB Index (white) vs. SPDR Gold Shares (GLD, orange), 1 Year

Source: Bloomberg

In this case, Gold (as measured by the GLD ETF) spent most of the last year diverging from CRB.  In the last quarter, after selling off, GLD finally began following the CRB Index higher.  We have seen slight underperformance by GLD over the past few days, but the trends – at least for this quarter – have been generally similar. 

A couple of graphs is hardly enough evidence on which we can draw a major coinclusion, but there are takeaways that might be tradeable.  First, T-notes are generally linked to inflationary measures, but not on a day-to-day or even week-to-week basis.  Second, while gold can follow commodity price inflation, it can also diverge for extended periods of time.  Third, seasonal factors may override longer-tem considerations. 

Inflation remains a concern for investors in various asset classes, but it is clearly not the only factor influencing their decisions.

Disclosure: Interactive Brokers

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