US government bond are still considered the safest thing on earth

Outlook: We get CPI today, expected up substantially to 8.4% from 7.9% the month before. We can blame post-lockdown demand, supply chain cost pushes, and the Russian invasion of Ukraine.

But also important is the New York Fed’s survey showing expectations for the future. While the public expects today’s data to be grim, by March 2025, it expects inflation at only 3.7%. This is down from 3.8% in February! And see the ZEW data above–Germans also expect a massive drop in inflation.

Wishful thinking? Are we being snookered or is this realistic? Judging from Fed resolve, yes, it’s realistic. As for being snookered, it all depends on the Russian war and what happens in the oil/gas industry. Nobody is willing to forecast that right now. Today we woke up to the US contemplating higher ethanol content in gasoline, which reduces reliance on oil but also raises smog (and may not work if the sources of ethanol, like corn, are supply-constrained).

If the public is right, we may well have a real return on fixed income for the first time in years. Say what you will about the motivation to save, a decent return on a safe investment will not go unnoticed. Right now, a savings account at Goldman Sachs yields 0.5%, and that includes a recent increase. Remember that while many folks have an interest in equities because they have IRAs and pension funds, the majority of Americans have no equity trading accounts, aka no skin in the game. And often deep suspicion of the stock market, some of it justified. But US government bond are still considered the safest thing on earth. Nobody is saying so, but positive real yield on government paper may seduce some crypto fans away. Not the get-rich-quick gang, of course.

We have been complaining about the disconnect between the real economy and the bond market for a long time. This shows up most dramatically as a deeply negative real rate, and that was true even before inflation started to get a grip last year. (Another is the insane situation in some European countries–was it Denmark?–where the bank paid you to take out a mortgage with them. At least we didn’t get negative rates in the US.)

Normalcy is hardly about to descend upon us, but here is a nice chart from the Daily Shot showing that TIPS–Treasuries protected against inflation–are nearing zero. Yippee! It’s progress.

We are likely going to get some churning and burning on release of CPI and a couple of Fed speakers today, but beware the Tuesday pullback. The dollar index is a dreadful indicator (and mostly the euro, anyway) but it’s what we have. Hitting over 100 is an invitation for a sell-off or at least some profit-taking.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!