Why Do Bonds At Auction Seem To Care More About That One Auction Than ‘Inflation’?

Today, the Fed’s preferred PCE Deflator and its core put in with the CPI, the latter which was the highest in nearly thirty years. And it’s that one the Fed pays attention to most (therefore the public is meant to, too).

Bond yields that appeared to have been on a path toward 1977, however, have obviously instead stuck around as if none of those things had happened; or perhaps that none of those things matter beyond the here and now. This despite the Feb 25 auction going wrong. Or is it because the Feb 25 auction and only the Fed 25 auction went wrong?

That last part is factually true, which then continues a quarter of a year later to press forward on an entirely different basis than inflation, even reflation. Feb 24 meant Fedwire, thus risks of dealer problems spilling over upon any more including tiny disruptions into greater negative, deflationary consequences. That’s not just UST auctions, but now T-bills, secondary LT UST prices, and even the Fed’s frenzied RRP window.

We’ve seen all these things (dealers/collateral) happen before, repeatedly, so risks are higher than they otherwise might seem from the perspective of the CPI or PCE Deflator, core and headline.

The impressive April inflation numbers pale by comparison, especially given their makeup. The BEA reported today that the headline PCE Deflator rose 3.58% year-over-year, like the CPI the highest in more than a decade, but each were compared to their respective lowest point of last year’s recession. Substantial base effects have boosted these figures.

I know people are tired of hearing about these statistical excuses, yet in the case of the core PCE the impact from them is plainly obvious (see: above). Stripping food and energy prices from the PCE basket, the core year-over-year rate was 3.06%, the highest since time began (not quite, but that’s how it has been described).

Compared to January 2020, however, the core rate rose at just a 2.15% annualized clip which isn’t any different than previous reflationary periods. That’s really the point here; the inflation case rests – it has to – on the idea that this year and beyond is somehow very, very different from past years.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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