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Monday, April 22nd, 2013
critical indicators

13 0422 tips etc.

The chart above is a nice summary a couple of key aspects of the interest rate environment during the last sixteen years.  There have been some notable changes of late, although sizable earlier moves in the chart make the recent ones seem like mere blips.

Top:  After bottoming in December at just under 1.60%, ten-year yields moved a half percent higher by March 8, only to fall considerably since then.  Yields on TIPS also bottomed in March and moved higher, but have stayed negative.

Middle:  The “breakeven” rate, which is the difference between the two series in the top panel, is used as a gauge of the market’s expectations for inflation in the coming years.  It has dropped hard since March, down almost a third of a percent.  (For a Federal Reserve that wants higher inflation expectations, that’s not good news.)  Each of the previous two declines (also marked by arrows) in this spread have coincided with stock market weakness.

Bottom:  Another gauge of the interest rate environment is the so-called “real yield,” the difference between the yield on the Treasury note and current rates of inflation.  The measure has crawled back from negative territory, due to a decline in year-over-year inflation (as measured by the CPI).  Interestingly, the arrow in this panel marks the bottom in real rates, which coincided with a top in gold.

These are critical indicators for policy makers and market participants — and not just fixed income investors, given their inter-market importance.  (Chart:  Bloomberg terminal.  Monthly observations except for final data point of April 19.)

plug and play

The latest essay on the flagship site concerns our use of models in the investment world.  Whether we are institutional investors or analysts or portfolio managers or advisors, our tendency is to plug and play — to presume answers are what should come out of models.  On the contrary, what should come out are questions.