Over the past month, ever since
the CRB broke out, I have made the argument that inflation is alive and kicking and rates would suffer as a result. Well, the 10 year note chart here shows that the buying frenzy could be over which should open the door for a move in the rates towards the 3.25% level at the least. From this perspective, never mind the viewpoint that rates are heavily overvalued versus stocks or the fact that
the Fed's current policy is way too easy (arguing for a return to the mean), the 10 year note yield broke through the bollinger band while oversold as shown. As you can see from the breaks of bollinger bands in the past, each time a return to the 20 month moving average has become the target. Since I believe inflation is a problem, I don't believe this will contain the movement and ultimately 4 to 5% will be the target.
If stock earnings continue to climb along with a rise in inflation pressures, then rates could be moving beyond this range towards the 6% range. I remain bearish on bonds with the 2 year currently overvalued by roughly 150 basis points relative to fair value. Just as a side note, when TIPS are auctioned at negative rates, one has to believe there is a frenzy in the sector.
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