PPI surprise miss
Argh… US Treasury yields continue to rise, with another 7-10 basis points (bp) increase on the 10-year potentially leading us into loss-making territory. The US PPI data for February was higher than expected. This measure is the least analyzed of the three key indicators of US inflation, and most economists had anticipated a further decline. And the bond markets have reacted accordingly. We were caught blind sided here with so much recent attention on CPI and PCE inflation.
Krugman on PPI
Paul Krugman is among the few who recently discussed PPI inflation and its broader implications for the US economy—refer to the linked article for details. We'll leave it to you to decide whether today's PPI release invalidates his analysis.
Small market impact
In the bigger picture, recent shifts in USD interest rates have been relatively minor. The ‘sensible' course of action would be to increase the position size to get a dopamine hit necessary to keep traders glued to their screens for 12 hours a day. The mantra is “go heavy or go home.” Alternatively, one might dabble in the myriad of other bright flashing instruments on the screens, such as Bitcoin ETFs, corn futures, or something similar. #protips
Wrong, but lucky so far
On a serious note, finding oneself on the wrong side of two consecutive inflation reports and managing to avoid a loss certainly calls for a reassessment. It's better to suffer a blow to pride than to the wallet.
Strong demand for short-dated paper
Demand for high-quality, short-dated bonds has, thus far, remained strong. From our perspective, corporate treasurers are determined to lock in interest rates for up to 2 years, even considering paper with credit ratings as low as BBB+. They're more interested in the general direction of Fed policy rather than magnitude and timing of cuts. It's unclear whether the pickup in yield from investing in corporate credit is attractive enough compared to US Treasuries.
We're still inclined to favor bonds rising and stocks declining as we approach the end of the quarter.
Scratch that… now we're just 4-5bp away from the red. Perhaps it's time to sit in on a non-critical meeting as a way to abdicate from making a decision. (I was tied up on a call about a back-end server migration.)
Good luck, and sorry this one didn't work out as smoothly as we wished!
