There is currently no asset class on the planet more perplexing and inflicting more pain than the bond markets. Last Friday, the October jobs report showed strength across the board, with 531K new jobs and an unemployment rate that went from 4.8% to 4.6%.
The resulting action was a sharp drop in yields as the benchmark 10-year note easily broke the 1.50% level and almost breached 1.40% Keep in mind that the job report came just 48 hours after Chairman Powell officially announced the start of tapering and projected completion by June of 2022.
However, five days later we saw both PPI and CPI prints come in hot, the CPI at its highest in 30 years. This fact was coupled with some strongly disappointing bond auctions in the 10-year and even more disappointing for the 30-year. This news led to a surge back up in rates and now we are back closer to the 1.60% range on the 10-year yield.
So, what are the bond markets telling us? Is it that we have reached peak pandemic recovery and now have some tough slogging ahead? Or is that inflation is starting to become the focus for markets and may force the Fed to deal with it (much) sooner than anticipated?
Or is it the fact that President Biden has interviewed uber dove Lael Brainard as a possible replacement for Powell or the retiring Richard Clarida? Finally, maybe it’s simply a case of overleveraged macro funds that bet big on the curve steepening and little central bank intervention and are now suddenly and swiftly upside down.
The answer is…yes. You can make a case for all the above inputs. Which is likely why we are seeing high levels of volatility in fixed income and whipsaw moves. The real benefit this week has been the US dollar, and the metals. The charts below reinforce that. Is gold finally ready for a real move?