TIPS Lead Interest Rates Lower

JC Parets
April 13, 2017

The bond market has been fascinating lately for sure. Sentiment has been in one direction while price has gone in the complete opposite. Everyone seems to expect rates to rise and therefore bonds to fall. Position data certainly suggests that - the Commercial Hedgers have had a historic net long position. In other words, while the crowd assumes rates are going higher, the smart money is betting on the complete opposite happening. The ultimate arbiter, of course, is price. So today we want to take a look at what the intermarket components of the bond market are suggesting about the future of interest rates.

Here we're looking at a chart of the Treasury Inflation Protected Securities (TIPS) relative to traditional US Treasury Bonds. Since the par value of TIPS moves up and down based on the Consumer Price Index (CPI), it gives us a good gauge of inflation, especially when compared to traditional US Treasury Bonds. So here is a chart of $TIP vs $TLT with the U.S. 10-year yield plotted below:

TIP-TLT

Interest rates go up to counter inflationary factors while falling rates are pricing in lower inflation expectations. This chart shows the correlation well. I find it to be useful in helping come up with a conclusion about the next direction of interest rates. The TIP/TLT ratio looks like a nasty failed breakout above the downtrend line from the 2011 highs. If you recall, this was the point that commodities and emerging markets put in their highs. The risk here is to the downside.

So if you're wondering where US Interest Rates are heading, it's hard to make a bet that they're going higher any time soon. The risk here is to the downside.

Allstarcharts Members - I've updated all of the Bonds and Interest Rate Charts in the Chartbook and also added a few more. There will be some additional Interest Rate work added to that workbook over the next week. Click Here if you are Not already a member.

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