Coming Inflation?

It seems like everyone is discussing inflation and hyper-inflation scenarios. Let’s look at the data:

The chart above shows the 10-year Treasury yield. The yield has increased by almost 180% in the past five months. Although this increase is substantial percentage-wise, in hard numbers the yield is still barely at 1.46%, which is not that high, historically speaking.

If we zoom out, we can see decade-long trends. From the early 1960’s to late 70’s, the super-trend for yields was to increase, reflecting inflationary pressures. For the past 40 years, from the 80’s to today, the trend has headed towards lower yields.

This trend to ‘zero’ yield accelerated in the past few months due to government easy fiscal policy and the March 2020 crash. In this context, the rise back up to 1.46% seems to be a mean-reversion reaction towards more ‘normal’ but still very low yields. I guess the question in everyone’s mind is whether this uptick will be the beginning of a new inflationary super-trend. Looking at the chart, it is far too early to tell.

Performances of Inflationary Assets

Looking at performances of asset classes during the past three months, it is clear that inflationary assets have outperformed.

While bonds (and gold, interestingly enough) have underperformed.

Source : https://logical-invest.com/app/rankalletfs

February 2021 Performance

Our strategies took a hit this month due to exposure to gold and TIPS. Although both are good choices in principle for a market with rising inflationary expectations, this past month was different. Gold was down -6.8%, and TIPS fell -1.6%. The S&P 500 fell by -0.9%.

One could argue that February was actually ‘deflationary,’ as most portfolios holding equities, gold, and/or bonds fell in value. On the other hand, winners were energy and financials. Therefore, there seems to be an interesting sub-division among assets that are considered inflation hedges. We are monitoring the markets and may adjust our strategies accordingly.