Bond Prices Reflect Inflation and Crisis Expectations
- Posted by Greg Harmon
- on November 27th, 2012
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Throughout your schooling, whether in the trading room or the classroom you were taught that Bonds reflected, among other things, inflation expectations. If that is true then the question arises as to how far into the future are those expectations? Is the timing constant or changing? I find the whole concept flawed when looking at the price action. The ratio chart below of US Treasury Bonds ($TLT) against the CRB Index tends to show quite the opposite. For very long periods, 2003 to mid 2008, and then again 2009 through mid 2011, as inflation was rising the price of Bonds was also rising, meaning that the yield was falling. You can toss out all sorts of arguments about the change
to real rates and the risk free rate over this period. What I see is there is a strong correlation between bond prices and the CRB Index during these times. When a long trend in the Stock Market is happening. In fact the times where the correlation has weakened or inverted have happened in times of crisis, highlighted in orange. The Financial crisis is the first and the combination of the European debt crisis and US Fiscal debacle is the second. If you want to know that we are out of the current round of crisis, and ready for a long trend in stocks, watch for the correlation between Bonds and Inflation to return.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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