What’s Inflation?
Our preferred definition of inflation is a “tax raised not by a legislature, but by a central bank, which all currency users suffer.”
But exactly how much of a tax is inflation?
The fixed income market (bonds) is the best place to get an idea about the volatility ahead and what potential pain the global market will face.
This is a critical chart when we consider this question: Where will the 10-year Treasury bond yields go?
And the follow-up question: How much higher will yields trend over the next few months?
Inflation Calculation
There are two ways to consider “Break-evens” for bonds.
Look at their TIPS (Treasury Inflation-Protected Security) equivalent. This is a yield that is supposed to cover principal, interest, and inflation.
Look at the current 10-year yield and factor in the current CPI (inflation).
The massive surge in inflation helps to show just how far the 10-year needs to go for a person to just break even.
Right now, you’re losing about 7% a year by holding US 10s if you include the purchasing power loss thanks to inflation.
The Trend is Your Friend?
As the market prices in more rate hikes from the Federal Reserve as it begins the process of reducing its balance sheet, yields will keep heading higher.
The U.S. is in the early innings of the death of the bond bull market.
Thanks to this tightening, there will be a ton of Emerging Markets left bloodied in its wake.
That’s because as the dollar strengthens thanks to the Fed hiking – the spot price of the USD will rise vis-a-vis other currencies – emerging market countries will have a harder time paying back their dollar-denominated debt.
This echoes the 1997 Asian Currency Crisis, where most Asian currencies fell precipitously in the face of dollar strengthening.
Freedom Financial News
