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Inflation And Interest Rates: The Twin Sisters Of The Dismal Science

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The inflation numbers are in and they’re up but the yields on bonds are coming down.

It’s complicated. Fed Chair Jerome Powell seems to indicate that higher interest rates (designed to fight inflation) won’t be allowed to rise quite so fast. He’s pulled back somewhat from his August “gotta be pain!” remarks that he made at Jackson Hole.

It’s funny because the recent measures for inflation seem to suggest it’s getting worse but the bond market wants to ignore that and go with the good feeling it gets from the recent Powell comments. Have those who purchase bonds ever been wrong about these kinds of matters?

Those with economics degrees, now enjoying high paid investment bank gigs, look at their laptops in the morning and say to themselves, “This IS the dismal science. I should have majored in philosophy.”

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It was Scottish philosopher Thomas Carlyle who coined the term “dismal science” when he was writing about economics. His thesis was that the number of people in the world would always grow faster than the amount of food produced. Dismal.

Here’s the CBOE 30-Year US Treasury Yield index point-and-figure chart:

The yield peaked earlier this year up there at 4.4% and have now fallen to 3.56% as bond buyers returned to the market enthusiastically. Note that despite the drop this chart has yields remaining in a basic up trend. The 2020 low, not that long ago for the fixed income sector, was .85%.

The point-and-figure chart for the CBOE 10-Year US Treasury Yield index looks like this:

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At the beginning of the year 2020, the 10-year yield stood at .40%. In 2022, it peaked at 4.30%. That spectacular move was the result of bond investors dumping the stuff. Now, in late 2022, buyers have moved back in and the yield has fallen back down to 3.506%.

The point-and-figure chart for the CBOE 5-Year US Treasury Yield is here:

The uptrend in yield on the 5-year hasn’t gone anywhere. That’s a 2020 low at .20% and a recent peak at 4.40%. The buying of bonds that overcame sellers in the last few weeks has taken the yield back to 3.66%.

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Here’s the point-and-figure chart for the U. S. Treasury 2-Year yield:

The yield hit .13% in 2020 and, after peaking a few weeks ago at 4.50%, it’s now at 4.28%. The main thing about this chart is how the 2-Year yield is back above a downtrend line that dates back to the Paul Volcker era of the early 1980s. So far, that trend back upward remains intact, a troubling thought for the real economist.

All of the above is subject to the words of Jerome Powell and whatever the next consumer price index reflects, among other factors.

Source: Fox Business

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