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Confusion Over Fate Of Inflation Reaches All Time Record: Are Bonds Actually Wrong?

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http://www.zerohedge.com/article/confusion-over-fate-inflation-reaches-all-time-record-are-bonds-actually-wrong

While generically completely useless, both during increases and decreases as all it is, is a reflexive and very much coincident market indicator, the UMichigan consumer confidence index does have one useful feature: it tracks respondents' 1 and 5 year inflation expectations. For what it's worth these are very volatile, but by and large trend with the moves in short-dates bonds. Indeed over the past 30 years, the 1 Year inflation expectations has tracked the moves in the 2 Year bond very closely. Until today: the 1 year inflation expectations jumped from 3.4% to 4.6%, a 1.2% jump in one month, this is the single highest monthly jump in a decade since the 1.4% jump in December 2001, following the deflationary knee jerk reaction from the September 11 attacks. But what is most interesting is that as the second chart below shows, the spread between the 1 Year inflation expectation and the 2 year bond yield is now at a record wide. This means that either consumers and bonds are at record odds over how they view the inflationary environment in the future, or that there is no real bond market in the short end (all the way up to the 2 Year bond), which is dictated purely by the Fed, and its monetization activity. We believe it is a mixture of the two, although if even US consumers for whom non-core inflation is allegedly supposed to be less of a burden (and recall Dudley's Let Them Eat iPads speach) are starting to freak out about rising prices, perhaps for the first time bonds, courtesy of central planning, may actually be wrong.

Anyone agree with this analogy? Has the Fed for the moment beaten the bond market? Rigging the system was never so easy.

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http://www.zerohedge.com/article/confusion-over-fate-inflation-reaches-all-time-record-are-bonds-actually-wrong

Anyone agree with this analogy? Has the Fed for the moment beaten the bond market? Rigging the system was never so easy.

The only thing holding up the bond market is the central banks purchases. If they weren't buying in such quantities then yields would be much higher to reflect the REAL inflation rate in the West.

Faber reckons the USA's real inflation rate is 5%+, here I would say 7%.

The governments are spinning the inflation figures and buying huge quantities of paper (at one point the BoE were purchasing 80% of the issuance).

Ponzi schemes can go on for so long but once the music stops then the bond market will implode. Hence why an asset class that was once relatively low risk is now high risk. This is the problem that bond holders face, they are using the empirical safety of lowering bond yields since the early 80s to imply the same safety over the next decade.

All secular cycles mean revert. The bond market as with UK property currently must and will mean revert. When it happens both bubbles will pop.

I have been following the yield curve in the FT on a weekly basis and it gets steeper by the month. Last month it has fallen somewhat but prior to this its been steepening for months on end.

Edited by ringledman

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When the Fed buys bonds it creates a demand for bonds and so decreases the yield on bonds. It's an artificial way the US uses to control interest rates. During QE the Fed purchased so many bonds that it now owns more US bonds than any other nation. I think it owns about 40% of its own bonds. When QE stops the yield of short term bonds should rise to approximately match expected inflation over the period of the bonds. My worry about purchasing US bonds would be that the US have increase the monetary base by so much, including the purchase of $1.2 trillion of sub-prime mortgage back securities, that inflation is going to really take off as soon as QE is stopped and the price of bonds will plummet. Even if QE is maintained there is the likely risk that the dollar will rapidly devalue, I personally am steering clear in investing in the US at the moment. That said it may be quite a bit of time before the shit hits the fan there in terms of investments, but you would have to be prepared to move your investment out rapidly.

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I don't think that's true. Aside from around november when the short end started to move higher, the curve is flatter now (and was a month or so ago) from a 3m, 6m and yoy perspective.

For the past 18 months, most weeks it would appear that the yield curve is slightly to the left of the previous week or month's line shown in the FT.

I agree it has flattened somewhat in the last couple of months.

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When the Fed buys bonds it creates a demand for bonds and so decreases the yield on bonds. It's an artificial way the US uses to control interest rates. During QE the Fed purchased so many bonds that it now owns more US bonds than any other nation. I think it owns about 40% of its own bonds. When QE stops the yield of short term bonds should rise to approximately match expected inflation over the period of the bonds. My worry about purchasing US bonds would be that the US have increase the monetary base by so much, including the purchase of $1.2 trillion of sub-prime mortgage back securities, that inflation is going to really take off as soon as QE is stopped and the price of bonds will plummet. Even if QE is maintained there is the likely risk that the dollar will rapidly devalue, I personally am steering clear in investing in the US at the moment. That said it may be quite a bit of time before the shit hits the fan there in terms of investments, but you would have to be prepared to move your investment out rapidly.

The dollar is wekening significantly. There is support at 75 on the dollar index and then 71. If it breaches these then there will be a rout on. I see a strengthening in the short term, then medium term who knows...

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The only thing holding up the bond market is the central banks purchases. If they weren't buying in such quantities then yields would be much higher to reflect the REAL inflation rate in the West.

Faber reckons the USA's real inflation rate is 5%+, here I would say 7%.

The governments are spinning the inflation figures and buying huge quantities of paper (at one point the BoE were purchasing 80% of the issuance).

Ponzi schemes can go on for so long but once the music stops then the bond market will implode. Hence why an asset class that was once relatively low risk is now high risk. This is the problem that bond holders face, they are using the empirical safety of lowering bond yields since the early 80s to imply the same safety over the next decade.

All secular cycles mean revert. The bond market as with UK property currently must and will mean revert. When it happens both bubbles will pop.

I have been following the yield curve in the FT on a weekly basis and it gets steeper by the month. Last month it has fallen somewhat but prior to this its been steepening for months on end.

I don't believe a word of it, TPTB have assured me the bubble is in gold!

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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