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10-Year Treasury Yield ‘Fair Value’ Estimate: 18 November 2021

The 10-year US Treasury yield has been moving higher in recent weeks. Does the shift signal an extended run higher? There’s a firmer upside bias lately,…

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This article was originally published by The Capital Spectator

The 10-year US Treasury yield has been moving higher in recent weeks. Does the shift signal an extended run higher? There’s a firmer upside bias lately, although this change doesn’t yet look decisive, although our average fair-value estimate of the 10-year rate continues to indicate that the path of least resistance is up.

Let’s start with a simple profile of recent trending behavior. A set of moving averages now point to an upside bias for the first time since the spring. The recent change could be noise, of course. Much depends on how the trending signals evolve in the weeks ahead. But for the moment, it appears that downside bias that prevailed through the summer has faded.

One reason for reserving judgment: the 10-year rate has traded in a tight range since our previous update a month ago. Although elevated inflation endures, along with encouraging signs for a rebound in economic growth in the fourth quarter, this macro information has yet to lift the 10-year rate decisively above the recent highs. That’s a clue for wondering if a prolonged trading range is the likely outlook for the near term.

Meanwhile, CapitalSpectator.com’s fair value estimate of the 10-year rate continues to signal a case for a higher yield. The median estimate for October is 2.07%, comfortably above last month’s 1.58% market rate (based on the average for October). The 49-basis-point spread in favor of the mean estimate suggests that the market is modestly underpricing the 10-year rate and so, in theory, there’s pressure for repricing closer to 2%-plus.

Another way to look at the spread is to see it as a factor that will ease downside bias for the market rate. By contrast, when the mean estimate is below the current market rate, that’s a factor suggesting the 10-year rate will fall or have a tougher time rising. The last time that the fair value estimate was below the 10-year market rate was in March-May 2021. Not surprisingly (or so one could argue), the 10-year rate fell from that point forward through late-summer — a trend that, for now, appears to have run its course.

For clearer perspective on the spread, the chart below shows how it’s evolved since 2010. Since June, the spread has been negative, meaning that the fair-value estimate is above the market rate. Although the negative spread eased in October (turning up to -49 basis points from September’s -0.64), it’s still below zero. That’s a factor suggesting that the current market rate will be flat to higher in the near term.


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Author: James Picerno

Economics

Major Asset Classes | November 2021 | Performance Review

Red ink swept over monthly results for most of the major asset classes in November. The two exceptions: US investment-grade bonds and inflation-indexed…

Red ink swept over monthly results for most of the major asset classes in November. The two exceptions: US investment-grade bonds and inflation-indexed Treasuries. Otherwise, losses dominated global markets last month, based on a set of proxy ETFs.

Inflation-indexed Treasuries (TIP)  topped performance list in November with a 0.9% gain. A broad measure of US bonds (BND) was in second place with a 0.2% return.

Elsewhere, losses held sway. The biggest setback: a broad measure of commodities (GCC), which tumbled 5.5%.

The downside bias of late has pulled more asset classes into the red for year-to-date results. US real estate investment trusts (VNQ) and US stocks (VTI) are the upside outliers, but gains for the year are becoming increasingly scarce across global markets as 2021’s close approaches.

The Global Market Index (GMI) was caught in November’s correction. This unmanaged benchmark (maintained by CapitalSpectator.com), which holds all the major asset classes (except cash) in market-value weights, slumped 1.9% last month. Year to date, however, GMI is still comfortably in positive territory via a solid 10.8% increase.

Comparing GMI to US stocks and bonds still shows a strong middling performance over the trailing one-year period vs. a potent rally for US stocks (VTI) vs. a flat to slightly sliding performance for US bonds (BND) over the trailing 12-month window (252 trading days).


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Economics

Fed Chair Jerome Powell: Inflation is NOT Transitory

You know those ultra-dovish monetary policies they told you not to worry about? Well, it’s time to start worrying about
The post Fed Chair Jerome Powell:…

You know those ultra-dovish monetary policies they told you not to worry about? Well, it’s time to start worrying about them, because as Fed Chair Jerome Powell himself finally said, it is “time to retire the word transitory regarding inflation.”

That’s right folks, in a surprising turn of events, Powell delivered the final nail in the coffin of team transitory, effectively announcing that the word no longer defines the current economic landscape and should be scrapped entirely. “It carries a time, a sense of [being] short-lived,” said Powell regarding the word in question. “We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain clearly what we mean.”

The latest Senate committee meeting marks the first time that Powell has officially and clearly admitted that inflation is not merely temporary, as himself and his Federal Reserve minions have repeatedly reassured. And although it certainly is a proper step in the right direction in terms of abandoning the transitory narrative, it comes a little too late, because as a recent Bank of America reading shows, both transitory and persistent inflation meters sit at an all-time high.

Indeed, October’s CPI reading hit a 30-year high of an annualized 6.2%, following consecutive months of inflation readings exceeding the 5% mark. As a result, Powell also acknowledged that the Fed will have to evaluate its current rate of bond purchases as well. “At this point, the economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases,” he explained.


Information for this briefing was found via Reuters. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Fed Chair Jerome Powell: Inflation is NOT Transitory appeared first on the deep dive.





Author: Hermina Paull

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Economics

Fed Chairman Retires Laughable “Transitory Inflation” Line

In recent days, the Fed announced it would not only begin – but possibly step up – its tapering of monthly bond purchases, and global markets have…

In recent days, the Fed announced it would not only begin – but possibly step up – its tapering of monthly bond purchases, and global markets have not liked what they heard. Stock indices fell last week and again this week, despite some brief recovery rallies.

Extremely Low Prices

The new Covid “Omicron” variant is also a bearish factor for markets. Many parts of the world were finally seeing some light at the end of the tunnel as the virus hysteria waned. But recovery hopes are taking a hit as volatility increases in tandem with Omicron headlines.

Fed Chief Jerome Powell acknowledged during his testimony on Tuesday before the Senate Banking Committee that inflation is indeed a persistent problem – even as he refused once again to take any responsibility for creating it.

Powell also formally retired his laughable “transitory” inflation line, saying “I think it’s probably a good time to retire that word…”

Powell’s comments yesterday were more hawkish in tone, and, despite the rhetorical repositioning, the Fed is well behind the inflation curve.

In reality, though, the Fed simply will not tolerate significant and ongoing selling in equities.

As such, the central bank could still put the brakes on its tapering or rate-hike plans and continue to let inflation run hot for an extended period of time. That outcome is vastly preferred to upended stock markets wracked with fears the Fed is being “too aggressive” in reducing the pace of its market interventions and indirect bailouts.

      





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