Assuming a bullish market, one of the key considerations about sector positioning is the state of long-term yields and their relationship to short-term yields. For example, segments that tend to be more positively correlated with rising yields are Materials, Industrials, Financials, some Commodities and even Semiconductors. These are very cyclical areas whereas big Tech and internet-based services are less cyclical, as are defensives like Healthcare and Staples.
Point being, that we have been playing the rising/dropping yields game since the deflationary crash in March as the Fed tries to inflate our way to economic prosperity. That’s trick wording, as inflation takes from somewhere (like the average worker’s purchasing power) while giving to somewhere else (like the asset owner class in the form of rising prices of those assets). But I digress.
Long-term yields tend to positively correlate with inflation. As you can see, the 30 year yield is still in a major downtrend (by the daily SMA 200), but I have been on watch all along for when the bond market will lose its grip, inflation will take hold and the yield will rise. Here’s the daily chart, trending down but constructive as it turns the 50 day average sideways.
Here is the big picture monthly view of the 30yr yield, AKA our Continuum of declining yields that has given the Fed license to inflate at every deflation scare (lower bound). Of course, when the Continuum hits or exceeds the limiter (EMA 100) to the upside the Fed plays tough guy because they do not inflate while inflation signals are ramping (as indicated by the periodic pings to the red line). As it stands now, the big picture is flashing a GREEN LIGHT for inflation. They are practically begging for it.
The ‘inflationary 2021’ view remains on course as long as the daily chart at the top remains constructive and as long as inflation expectations (IE) – as illustrated here by RINF – continue to climb. The trend in IE has been up since April. This week it held the daily SMA 50 and is bouncing.
Bottom Line
It feels like I’ve been a rebalancing fool for much of 2020, but that is because it is a year that has included both deflation and inflation, and because the Fed is in there so aggressively supporting asset markets. It’s a jumpy situation as the indicators fly around on a weekly and often daily basis. Wax on, wax off in hyper drive.
We continue the lean toward inflationary 2021 and with the hold of nominal long-term yields and the yield curve still in an early steepening mode, the process can include the precious metals as well because gold prefers a steepening curve (long-term yields rising faster than short-term yields) and the economic stress it would eventually entail (whether inflationary or deflationary). What gold surely does not want is a flattening curve with nominal yields rising (ref. the post-2012 phase).
Assuming an inflationary macro, many boats can rise with a steepening curve for a while, but eventually some of them would start to take on water as the economy weakens under the pains of inflation.
The update got a little more wordy than planned, as I just wanted to talk a little about long-term yields. But there it is anyway.
