Let’s face it: Interest rates have been artificially depressed for the last decade. Central banks, including our own Federal Reserve, have manipulated rates and stimulated economies to the point that no one seems to know what a normal rate environment should look like.

Recently, though, interest rates have moved sharply higher.

The Fed stopped buying bonds and ended quantitative easing (QE) back in December 2013, but the long-term Treasury yield didn’t bottom until July 2016.

After President Trump was elected in November 2016, Treasury yields jumped above 3% (a 50% move), topping out at 3.19% a couple times before backing off.

You see, rates bounced with Trump’s promise to cut taxes, roll back regulations, and pump more money into infrastructure. For those same reasons, stocks moved to record highs. Rates seemed to be moving out from under the Fed’s boot.

But, after the initial excitement faded, long-term Treasury rates bounced around between 2.66% and 2.93%. One ingredient was missing to help push rates higher.

Overall, the U.S. economy was improving. Unemployment was low, consumer spending was up, housing was healthy, and the manufacturing sector was on the upturn. Even wages started moving higher.

The odd man out was inflation. Consumer inflation was simply not moving higher, which the Fed admitted was pretty confusing.

That all changed with January’s Consumer Price Index (CPI), released a few weeks ago. Prices jumped 0.5%, which was well above expectations of 0.3%. Core prices (excluding food and energy) moved up 0.3%, which, again, was higher than the expected 0.2% rise.

That’s how we found the missing ingredient. The markets reacted by selling off long-term Treasury bonds, thus moving yields higher.

And, to compound the situation, last week the U.S. Treasury auctioned off a quarter of a trillion dollars of Treasury debt. The huge supply of debt hitting the market, along with weak demand, helped move yields even higher.

Yields on short-term Treasury bills hit levels not seen since 2008, and the seven-year Treasury note auction produced a yield of more than 2.83%, the highest since 2011. The yield on the 30-year Treasury bond moved past the resistance level of 3.19% and all the way up to 3.23%. The next area of resistance looks to be around 3.35%.

According to the minutes from the Fed’s most recent policy meeting, the majority of voters saw the need for more hikes because of stronger economic growth and greater inflation risk. They’re a little worried they might be late in lifting rates before inflation rears up and the economy overheats.

But not all of the participants agreed. Some worried that the flattening yield curve could signal recession if it finally inverted. In other words, if short-term yields go higher than long-term yields, we could be in trouble. They agreed to monitor the situation closely.

The bottom line is the Fed will maintain its current trajectory, with the expectation of three more incremental rate hikes this year, but it could add another if inflation heats up.

As I write, long-term Treasury yields are at about 3.16%, having come back a bit from last week’s thrashing.

We’ll get an update from new Fed Chair Jerome Powell when he presents the semiannual Monetary Policy Report and then testifies to Congress later this week.

January data on the Fed’s preferred inflation measure will also be released Thursday morning. The personal consumption expenditures price index, or PCE price index, is highly anticipated by the markets.

If there’s another surprise to the upside, look out!  Yields could jump even higher. You can prepare for and profit from surprises in the financial markets, and specifically in the Treasury bond market, with Treasury Profits Accelerator.

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Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.