When long-term Treasury yields started to climb mid-month and closed at a high of 3.24%, I didn’t see fundamental evidence to suggest that higher inflation was on the way.

Recent economic and market developments haven’t changed my view.

The 10-year Treasury yield rose to more than 3.11% early last week, while long-term yields ticked above 3.2%.

Yields didn’t reverse until April new-home sales came in 15,000 below expectations on Wednesday. March sales were revised lower by 20,000, a hefty adjustment.

Existing home sales were also down 2.5% month over month and 1.4% year over year. Existing sales aren’t as important to the overall economy, but these numbers show that the real estate market has started to feel the pain of higher rates.

The Federal Open Market Committee (FOMC) released the minutes from its May meeting on Wednesday afternoon; the contents likely contributed to the sharp fall in yields.

The voting members of the central bank’s policy-making arm are led by Federal Reserve Chair Jay Powell. But they all have their own opinions about the direction of inflation, wages, employment, and, ultimately, the necessary policy prescriptions.

Last Wednesday’s minutes reveal that most Fed officials expect the next rate hike to happen very soon.

In fact, a hike is pretty much a certainty at the FOMC’s June meeting.

Policymakers seem to agree that it’s OK if inflation moves above the Fed’s 2% target for a bit. In the minutes, some officials noted that if “oil prices remained high or moved higher, inflation would be boosted by the direct effects and pass-through of energy costs.”

That makes sense.

The minutes also revealed some disagreement concerning the yield curve, which is the difference between short-term and long-term yields.

Some members noted that hikes in the overnight federal funds rate (affecting short-term rates) and the gradual shrinking of the Fed’s balance sheet make “the slope of the yield curve a less reliable signal of future economic activity.”

But several participants said “it would be important to continue to monitor the slope of the yield curve, emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.”

So far, the yield curve hasn’t inverted, which is what happens when long-term rates move lower than shorter-term rates. An inverted yield curve often signals a recession may be coming down the pike.

However, the yield curve has flattened.

A recession is worrisome, of course, and several Fed officials are paying attention to the yield curve.

Recession fears may have caught the attention of bond traders, as long-term rates fell sharply Wednesday through Friday. The 30-year Treasury bond moved well off of its recent high and is approaching its six-week low of just under 3%.

That’s quite a reversal from all the worries about inflation less than two weeks ago.

My system recognized the market’s overreaction and subsequent rise in Treasury yields. Readers who followed my trade alert booked a tidy 36% gain when rates fell last week.

I’m eyeing another opportunity this week to play the decline in Treasury yields.

You can prepare for and profit from surprises in the financial markets with Treasury Profits Accelerator.

Good trading,

Lance

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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.