Treasury Yield Signals Major Shift in Market Focus
Markets have moved on from President Trump and Iran and are now clearly focused on inflation.
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One week ago, we warned that Treasury yields were signaling trouble ahead. We even set target yields for the 10-year Treasury note and the 30-year Treasury bond.
We didn’t expect one of our targets to be hit within a week. The yield on the 10-year Treasury note has already reached our target of 4.65%, trading as high as 4.69% on Tuesday. One week ago, that yield was 4.46%.
Checking the chart, the T-note’s yield looks like it was shot out of a cannon, launched from its rounded bottom continuation pattern (shaded yellow). Note how far the yield is above its 50-day (blue) and 200-day (red) moving averages.
We projected the 30-year Treasury bond’s yield to move from 5.03% to 5.40%. On Monday, that yield touched 5.20%. Again, it was a violent move, as the T-bond blasted out of a cup-and-handle pattern (shaded yellow).
Sounding the Alarm
The most alarming aspect of these moves is that both the stock and bond markets ignored President Trump’s decision to give Iran additional time to reach a peace deal.
Over the past few months, markets would fall, and yields would rise, when Trump would engage in saber rattling. Then, stocks would rally and yields would fall when he would soften his demands. In other words, the market was reacting to Trump, and the war with Iran was the primary focus.
The activity of the past few days shows that markets have now moved on from Trump and Iran, and are focusing on inflation.
The Last Straw
At what moment did the focus shift away from the war in Iran and toward inflation? Last week’s consumer price index report was on the high side, but it wasn’t alarming.
However, the producer price index report showed a startling increase in prices at the wholesale level. April’s 1.4% increase was much higher than the anticipated gain of 0.5%, and the highest jump in producer prices in over four years.
Core producer prices, which exclude food and energy, jumped higher by 1% in April, well above the analysts’ estimate of 0.3%. It was the highest monthly increase since March 2022.
It was last week’s core PPI report that changed the focus of the markets.
What Does It Mean?
We all know that energy prices are high. What the producer price index is telling us is that inflation has now bled over into mainstream, non-energy-related prices.
If the cost of fueling a truck rises, the goods transported on the truck eventually become more expensive, because the cost of transporting those goods has increased. This is a simple explanation of how inflation moves from energy into the mainstream.
The increase is also passed from the producer to the consumer, so the recent sharp increase in producer prices could lead to higher consumer prices.
The Law of Attraction
The higher the yields on Treasuries go, the more attractive those yields become.
Imagine you’re a hedge fund manager. The market has been good, so it’s likely you’re sitting on some gains.
You want to keep those gains. If you could get 5% or more risk-free, you might be tempted to invest in Treasuries. This would mean pulling money out of stocks.
If yields continue to rise, they’ll become too attractive to ignore. That’s why investors need to have a game plan, and need to trim holdings when appropriate, as we did on Tuesday.
Bottom Line
Markets climb a wall of worry. If yields back off, stocks will continue their assault on the heavens.
However, keep these yields on your radar. Remember the three tips we discussed recently, and always have a game plan.
