TopDownCharts: "Chart of the Week - Bond Yields and Inflation"

TopDownCharts: "Chart of the Week - Bond Yields and Inflation"

Treasury Yields and the Long-Term Rate of Inflation: A lot of people have gotten excited about the surge in annual inflation rates, but in my view it’s arguably more interesting to look at the 10-year compound annual growth rate of CPI (long-term inflation rate) — particularly as it pertains to bond yields.

 
 
 

Typically bond yields follow the growth/inflation pulse, with a particular emphasis on growth in the shorter-term. But as we can see in the chart below, bond yields over the longer-term trace a fairly similar path to the longer-term rate of inflation.

 
 
 

Arguably the current move in bond yields has more to do with inflation than growth. Perhaps even to the extent that we could end up seeing growth momentum falter (as the leading indicators suggest), but still see bond yields move higher given the permanent bump to prices and lingering effects on the longer-term rate of inflation.

 
 
 

In terms of the “so what?“ — if we were to take this chart literally, US 10-year treasury yields would need to rise to around 4.5%+ to line up with the current and expected pace of this longer-term inflation rate…

 
long-term inflation bond yield model - explainers of 10-year treasury yield level
 
 
 
 
 

Key point: With an increasing fixation on inflation bond yields could go higher yet.

 
 
 
 
 
 
 

NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/

 
 
 
 
 
 
 

Best regards,

 

Callum Thomas

 

Head of Research and Founder of Topdown Charts

 
 
 

 

 

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TopDownCharts: "Chart of the Week - Bond Yields and Inflation"

Callum Thomas

Head of Research

Callum is the founder and managing shareholder of Topdown Charts. His career background is in multi-asset investment management in New Zealand and Australia, with a focus on investment strategy and economics.  

Callum has a passion for global economics and asset allocation strategy and has developed strong research and analytical expertise across economies and asset classes.  Callum's approach is to deploy a blend of factors to build out a holistic picture and raise conviction. This includes valuations, monetary conditions, cyclical indicators, sentiment, and technicals.  Callum believes innovation is vital to maintaining an edge through investment research and is on a constant mission to uncover and develop new datasets, indicators, and new ways of looking at the world to drive sensible and profitable decision making by portfolio managers.

LinkedIn: https://www.linkedin.com/in/callum-thomas-4990063/

Twitter: https://twitter.com/Callum_Thomas