TIPS & Gold (excerpt)

The core CPI and personal consumption expenditures deflator (PCED) rose only 1.7% and 1.1% y/y during April. The latter is the lowest reading for the core PCED on record and well below the expected inflation rate in the 10-year TIPS, which is also falling.

The demand for inflation-protected bonds tends to rise (fall) when inflationary expectations are rising (falling). In the current environment, inflationary expectations are falling, and so is the demand for inflation-protected bonds, which is why the TIPS yield is rising.

The narrative gets more interesting still when we see that the inverse of the TIPS yield remains highly correlated with the price of gold. What’s that all about? Obviously, rising gold prices must reflect some concerns about rising inflation, which would increase the demand for TIPS. This year’s break in the gold price suggests that inflationary expectations are coming down, and so is the demand for TIPS. By the way, the price of gold tends to be a useful indicator of the underlying trend in industrial commodity prices.

Today's Morning Briefing: Clash of the Titans. (1) Despite all the clashes, stocks at record highs. (2) The clash that could crash stocks. (3) Central bankers are central planners. (4) Bond Vigilantes are rising from the dead. (5) Mythology and the bond market. (6) Yields rising despite record low inflation reading. (7) Bad breaks for gold and TIPS. (8) Back to old normal in bond yields? (9) The Fed is getting cornered. (10) Don’t bet against the richest men in the world. (11) The Hindenburg Omen. (More for subscribers.)