Bond Yield at Inflection Point

In The Highstreet Group by admin

Bond prices have recently been ticking higher (lower yields) receiving the benefit of a “quality flight” from equities (as they sold off) along with apparent geopolitical event risk from Russia’s intrusion into the Ukraine.  Although bond yields were falling, short of an equity collapse perhaps precipitated by insurgencies in the Ukraine, the bonds have two fundamental hurdles to overcome.  First, a falling dollar is certainly not friendly to holding fixed-return dollar denominated holdings.  This is true simply because currency depreciation proportionately reduces the value of the coupon payments especially to foreign holders and significantly adds to interest rate risk as yields may adjust higher to compensate for the currency risk. Second, the FED is clearly targeting higher inflation nearly exclusively now that they have all but abandoned targeted employment levels.  Higher inflation has, and always will be a significant headwind for lower bond yields or higher bond prices.

With that said, we are currently short the bond market as we expect prices to fall and yields to rise. We feel that the FED will continue to taper reducing the demand for bonds even more. Over the short term would like to see the bond retest the recent lows around the 128 to 129 level. Intermediate to long term we feel that a large head and shoulders position is being built that could result in a substantial sell off in bonds to the 120 level.