10Yr U.S. Treasury Yield Curves

Bond Market Signals

The price action in bonds took an interesting turn this week as yields dropped into a CPI print that showed rising inflation. Expectations were that bond yields would rise on a higher than expected number (which we got) so the drop was a surprise to many. As you can see below, yields rose dramatically starting last August in anticipation of an economic recovery. And then yields accelerated higher in Q1 of this year as inflation expectations rose as the pandemic lockdowns subsided.

Now, we have an uneven recovery with workers slow to return to their jobs and supply chains interrupted. So this part of the recovery will be tricky to read as you could say lower yields are signaling slower growth or maybe that inflation will abate or some combination of the two. But the answer may be in the chart of 10Yr Treasury yields.

If you look at the Relative Strength Index (RSI) at the bottom you can see an overbought condition was created with a reading above 70. All overbought conditions are eventually worked off through corrective price action so this looks like 10Yr yields could fall as low as 1.277% in the coming weeks before resuming a push towards 2%. Without this chart it all seems very confusing considering a recovery from a pandemic is like a 100Yr flood – nobody has that playbook. The recovery should continue and inflation pressures will exist until there is equilibrium in the supply chain (probably next year). To sum it up, yields should drop in the coming weeks and push higher into the end of 2021. How did the stock market react to all of this?

Well, the S&P 500 made a new all-time high after many weeks of trading sideways. You can see in the chart below that not much has happened since April with the only action being a pullback to the 5/13 low at 4039. Since then, the S&P has had a choppy advance to new highs and a wedging pattern (purple lines) is now on the chart which implies a sharp pullback soon. However, some of the technical indicators like the advance/decline line are making new highs while volatility keeps making new lows. Both tell me that an imminent plummet in the S&P 500 is less likely and that equities will edge higher into the heart of summer.

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Economic & Central Banking Snippets 

Unemployment Programs
  • Initial jobless claims fell this week to 376k from 385k. Also, the number of job openings in April jumped to 9.29mm from 8.29mm in March (record high territory). More states are removing the additional benefits in June and July so there will be motivation for more people to come off the sideline and get back to work soon.
  • The UK economy in April rose 2.3% m/o/m about as expected as the economy further reopened with the very successful vaccination campaign.
  • U.S. Headline CPI in May rose by 0.6% headline and 0.7% core. Versus last year, headline CPI is now up 5% and the core rate by 3.8%, the largest increase since 1992. Inflation is having a direct negative impact on spending decisions. According to the UoM consumer confidence data, “More vulnerable households, those aged 65 or older and those with incomes in the bottom third, complained more often that inflation had already reduced their living standards, and those same households also anticipated a higher inflation rate in the year ahead.”
  • The increased CPI readings have pushed real yields into negative category in the chart below. These periods don’t last very long so either interest rates will rise or inflation will abate in the coming months.
Real 10Yr Yields Based on CORE CPI by Artemis Capital
  • The Fed’s balance sheet rose $16.6B to $7.95T so there is no “tapering” going on with their bond holdings.

Macro Snippets

  • A fresh wave of Covid-19 clusters in Asia is creating new bottlenecks in the global supply chain. An outbreak at one of the world’s busiest ports in southern China has led to delays in cargo shipments around the world. Infections at key points in the semiconductor supply chain in Taiwan and Malaysia are worsening a global chip shortage. (WSJ)
Container Rates
Bitcoin Thief
  • Consumers reported losing nearly $82 million to crypto scams during the fourth quarter of 2020 and first quarter of 2021. That is more than 10x higher than last year, according to the Federal Trade Commission. (WSJ)
  • Scientists said that carbon dioxide, a key driver of global climate change, rose in May to its highest levels in modern times, despite dramatic reductions in commuting and commerce during the pandemic. The levels were highest since measurements began 63 years ago, according to scientists at the National Oceanic and Atmospheric Administration (NOAA) and the Scripps Institution of Oceanography at the University of California San Diego. (Investopedia)

That is all for now and thank you for being a subscriber!

Paul J. McCarthy III


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.