– Matthew Boesler charts the recent spike in the yield for 10-year Treasury Inflation-Protected Securities (TIPS), which have entered positive territory for the first time since January 2012 and represent the rapid rise in inflation-adjusted interest rates in the US.
“For the first time in years, real interest rates are rising rapidly in America, leading to strength in the U.S. dollar – which is causing currencies around the world to crumble… Bond markets across both the developed and the emerging worlds are selling off as rising interest rates in the U.S. make American government debt a more attractive investment.”
“And while the rise in real rates is likely a sign of good things to come, right now, it’s causing jitters over the prospect of the removal of monetary stimulus from the market by the Federal Reserve.”
Karl Smith believes this represents a “large expected decrease in household savings presumably as consumption rises.”
“This would be an increase in domestic consumption. However, not a an increase that’s strong enough to raise inflation expectations… we may be seeing a supply-side boost from easing commodity prices. A casual look across the board at energy, primary metals, petrochemicals and agricultural yields suggests that such a boost is a upon us… In that scenario we would expect to see the labor force rise and unit labor costs to accelerate, but overall cost growth to be mild because declining materials costs.”