There has been a major repricing in US Treasuries since the end of January. A series of upside surprises to the data have strengthened the conviction that this economy can handle higher nominal and real rates. The real federal funds rate required to tighten financial conditions remains elusive. The Federal Reserve’s estimate of the longer run real federal funds rate (+0.5%) seems well off.
The Fed could be underestimating longer-run real interest rates by as much as 1.5% (i.e., 2% real yields are not out of the question). The bear market in bonds may have further to run.
It is not clear that retail traders, who are pouring a record amount into US stocks, are paying sufficient attention to what is going on in the bond market. Six-month Treasury bills currently yield 4.99%, the highest since July 31st, 2007. The S&P 500 earnings yield is around 5.08%. The S&P 500 risk premium is shrinking, compared to both nominal and real yields.
For now, it appears that the short-end of the US yield curve is pushing up the long-end. But at some point, supply/demand dynamics may come into focus. Excessive government bond issuance could begin to weigh on the long end.
Finally, in Japan, the y/y for the SRI-Hitotsubashi Consumer-purchase Price Index accelerated from 5.29% to 5.59% in the w/c February 6th, a new high.
