Bonds are once again taking a beating this morning, as the technical move back to the bottom of the trading channel takes place. A look at the longer-term chart shows a strong downward channel that will likely push rates to multi year highs in the near term. The economy seems strong enough to handle long term rates moving higher, at least for now. Given that we are long overdue for a recession, the risks of a pullback increase over time. Although the tax cuts may push that out further into the futures, there will be a time when stocks retreat, and our economy slows. Until then, enjoy the party.
Treasuries fell this morning, sending the yield on the two-year coupon over 2% for the first time since 2008. The fall in prices was driven by this morning’s Consumer Price Index (CPI) that showed inflation is hotter than the market anticipated. Stocks rose to new heights on the news and the likelihood of Fed rate hike in March increased to 80%. If the Fed’s Quantitative Tightening plan fails to slow the growth of the US stock market, we can anticipate the Fed to raise their targets from 3 planned rate hikes in 2018 to whatever is needed. Continued growth as we have seen would be unhealthy for the economy in the long run, as inflation would eventually kick in and drive consumer prices higher.
There continues to be excessive weakness in the bond market. We will maintain our locking bias.