Bond yields are currently diverging in a very big way from economic fundamentals, and our valuation tools point to a rise in yields.  Normally, there is a very tight correlation between the change in the ISM prices paid survey and the changes in the 10 year yield.  Higher price pressures mean higher yields.  Lately, we have seen prices paid rise quickly, yet 10 year yields have been falling significantly.  All measures of core inflation point to higher inflation.  Most surveys point to higher inflation, as is typical late in the economic cycle.

The only two times we can find where bond yields were right and prices paid were wrong was in 2001-02 and 2007-08 when the US was in a recession.  Our models don’t currently flag a high probability of a recession, so it is much more likely we will see a sell-off in bonds.

img1img2Source: Bloomberg and Variant Perception