[Chart Of The Week] Inflationary Forces Point To Higher Rates

JC Parets
November 7, 2016

Throughout the second half of 2016 I've remained in the camp that interest rates are going higher and that bonds are a fade. The action into 4th of July weekend originally put me in that camp and I continue to believe that, bigger picture, this is the underlying trend that we need to respect. The catalyst here, in many cases, is becoming more and more clear with each passing day. Forget the economy and the stock market, inflationary forces are moving in sync with the bond market suggesting a very high correlation between the inflation trade and higher rates.

Let's break this down using math and blatantly ignore anything the federal reserve has to say. Listening to them has been a time waster and money loser for years. I don't expect this trend to change any time soon. I'm sure they are nice people, but from a portfolio construction perspective, they offer absolutely zero value, and some might argue that listening to the fed is actually detrimental to a sound investing plan. I agree with both the latter and the former: that noise is toxic on all accounts.

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[hide_from visible_to="member"]This chart represents a ratio of the US Treasury Inflation Protected Securities vs US Treasury Bonds. A rising ratio shows money flowing towards securities that offer more protection against rising inflation at a faster rate than towards those which do not offer that protection:

TIP-TLT

The reason this is important is because we are seeing similar behavior from commodity prices as I've discussed in recent posts. Take a look at the TIPS/TLT ratio, but this time overlaid against the CRB Commodities Continuous Index (Remember this version of the CRB Index is equally-weighted and provides a broader representation of commodity prices compared to the other CRB Index):

TIP-TLT and cci

To press this theme a little bit further, take a look at the TIPS/TLT ratio overlaid against the US 10-year note yield. As long as this measure of money flow into inflation protected securities continues to trend higher, which right now everything is still suggesting, I would expect higher interest rates moving forward, particularly the benchmark US 10-year yield:

TIP-TLT and tnx

For a list of stocks and ETFs that I think will benefit from this trend, start your 30-day RISK FREE trial today and check out the Trade Ideas Page for yourself.

 

 

 Tags: $TLT $TNX $CCI $CRB $TIP

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