Baker Market Update – wk220114

After starting the week near its highest level in two years, the 10yr T-Note yield seems to have settled down a bit, currently hovering around 1.75%. Three consecutive sessions saw lower yields this week and we’ll likely end the day with the first weekly drop in a month. Having jumped 25-30bps since New Year’s Day, this is the pause that refreshes. A time to reassess the Fed’s newfound commitment to fighting inflation with more aggressive policy, and to rethink what constitutes good value in bond yields. It’s worth noting that the 5yr yield for example, at 1.50%, is above its average yield over the last twelve years. Moreover, its yield now exceeds the dividend yield on the S&P 500 for the first time since 2019. And buyers of US Treasury auctions this week were happy to bid ‘em and buy ‘em at current levels… the bid/cover ratio for the 10yr auction was a healthy 2.51%. Still, challenges abound as we saw another eye-popping inflation number when the Consumer Price Index came in at 7% YOY, a level not seen since Ronald Reagan was in his second year as President. So, make no mistake there remains plenty of uncertainty about how the year will play out.

In addition to CPI, we got producer price data that also remained elevated, and this morning we learned that retail sales screeched to a halt late in the holiday shopping season. The so-called “control group” for retail sales (which feeds into GDP calculations) was down 3.1% for the month, likely related to the surge in COVID Omicron cases as well as supply-disruptions and the above-mentioned jump in retail prices. There were also important developments related to the Fed this week as confirmation hearings took place for Chairman Powell and Lael Brainard who has been nominated as Vice Chair. Sarah Bloom Raskin, no stranger to the board of governors, was also nominated to become Vice Chair of Supervision. Two other nominees to join the board, Lisa Cook and Philip Jefferson are both academic economists who (pending confirmation) would round out the Biden Fed… more regulatory focused for sure, but probably little changed from the standpoint of monetary policy.

At this point, without exception, policymakers agree that inflation is enemy number one and policy should be focused on stamping it out. That, of course, raises questions about how much tightening is enough, and about the likelihood of a policy mistake. If COVID passes, we could return to a pre-pandemic regime of low growth and low inflation… the conditions that existed pre-pandemic. Therefore, caution and thoughtful debate needs to be the order of the day for the Fed rather than knee-jerk reactions to the day’s news. After all, financial markets see all news as old news and the price action today should reflect where we’re heading, not where we’ve been. A good point to ponder as we look forward in the year. Next week we’ll get data on consumer sentiment, housing market activity, and the index of leading economic indicators among other tidbits.

US 5yr Treasury Note Yield: 2010 – Today

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