Tips forecast inflation
January 5, 2021
–Despite the 1.5% decline in both SPX and Nasdaq on the first trading day of the new year, interest rates were little changed on Monday, with tens ending at 91.3 bps. However, downside option protection was bought in both tens and eurodollars, and vol firmed in front of today’s Georgia Senate runoff elections.
–One interesting level pertains to the ten year inflation-indexed note which closed at a new low of negative 112 bps. The breakeven closed at a new high of 203.3. The last time the ten year tip was near this level at -110 in early Sept, Feb Gold was 1986. Yesterday it was 1946.6 at settle, which was up $51.50.
–Even with a modest pullback in stocks, VIX nearly hit 30 before coming back to close just under 27.
–EDU1/EDU2 settled at a new recent low of 3.0, down 0.5 on the day, indicating little chance of the Fed being forced to move up a tightening schedule. Despite new lows in the dollar and a surge in commodities (for example, March Corn gained over 15% from the start of December) the rates market is quite certain that any inflationary impulses will be viewed as temporary.
