After a 13% decline in bonds in 2022, they are heading in the opposite direction in 2023. In the first ten trading days of 2022, the yield on the 10-year treasury rose nearly 0.2%. As yields rise bond prices fall and because yields were so low to begin 2022 there wasn’t much return cushion from income. That meant that a 0.2% drop in yield marked a near 2% decline in prices.
Now, in 2023, after the first couple of weeks, yields on the 10-year treasury have fallen 0.3%. This is almost a stark contrast to how 2022 started, and most of this performance comes as inflation fears fall.
As I pointed out in the last Chart of the Week post, shelter inflation is what is propping up the index, yet when you look at more real-time data rather than lagged data you will see that shelter is rolling over with everything else it just hasn’t shown up in the data.
The market is picking up on this and seeing the rest of the index roll over, and roll over fast.
As inflation continues to fall market optimism should continue to rise, leading to better performance for both stocks and bonds. We still don’t know what the Fed will do, which will determine what we see going forward, so there are still some challenges for asset classes.
The only concerning part of early rallies in markets is it could spark inflation concerns once again. Lower yields and larger rallies allow people and companies to borrow for less and spend more. Fueling demand and inflation. Structurally banks and lending institutions may not want to lend as much to people and businesses with the Federal Reserve offering 5% to park cash at the Fed but the risk still remains.
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