The TIPS spread is at a near 6 month high with the most current reading at 1.94. That is what is referred to the “10-year Breakeven Inflation rate”.

gold and tips

What we are seeing is the market beginning to expect the overall inflation rate to begin moving higher. Whether or not this will be the actual case is not as important as HOW THE MARKET PARTICIPANTS are sizing up the inflation picture as we move further out into the year.

Look at the chart and you can see the TIPS spread is back up to levels last seen in November of last year.

I have graphed onto this chart the gold price just to give you some indications as to how gold is reacting to all of this.

gold and tips

Generally speaking gold had been following the movement in the TIPS Spread very closely, moving up and down in sync with it until the beginning of this year. If you look closely you can see how the two have been moving opposite to one another at times. The link has definitely broken down with the movements in the gold price becoming much more erratic when compared to the spread as it was wont to do formerly.

I have noted that these relationships that I am constantly monitoring and on the lookout for will work until such time as they no longer work.

When that occurs is anyone’s guess but it does seem as if the link is now broken and thus the TIPS spread is not going to be that useful as another indicator that we can employ when attempting to ascertain the next direction in the move of the gold price.

With the bond market continuing to breakdown on the price charts, it certainly does seem as if the market is expecting a stronger reading in this coming Friday’s payrolls report and some general improvement in the overall economic data that will be coming our way.

We’ll see whether or not that is indeed the case but the facts are that SENTIMENT has decidedly flipped.

Look at how the spread on the Ten Year vs. Two Year yields has been steepening or widening out.

ten year two year

it is now at the highest or widest level since mid-December of last year. Again, further confirmation that the market is beginning to build in slightly higher inflation expectations.

Bonds have moved down into support on the daily chart.

Chart20150504152345

Will they hold here or break down? I do not know but if they do break, one can make a pretty reliable claim that from this point forward, long term rates are headed higher and that we have seen the historic lows in interest rates in our rear view mirrors.

 

 

 

 

Comments (4)

dan, does this mean that the correlation with gold and the 10 year treasuries may also be broken????Not sure there is difference between the tips spread and the 10 year treasury correlation????

thanks for you posts and updates.

shortstack;

It could very well be breaking down as well. I am not quite sure but it looks probable that the link may indeed be weakening. I want to see things AFTER the payrolls report numbers before making any more definite conclusions.

Dan

dfly;
I do not know as I am watching the charts to see how it acts. A lot of what we see this week is going to be ultimately subject to what the payrolls report gives us this Friday. Drawing too many conclusions ahead of that key report is something that we want to avoid. Let’s see what we get come Friday.
Ahead of the report, the euro does look to have run into some decent selling near the 1.1300 level. The market however is not breaking down either however as buyers keep coming in just below 1.120. I will be surprised if we were to get some sort of big move in the Euro ahead of Friday’s number unless we get a piece of US economic data ahead of that report that comes in very strong for some reason.

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