FOMC meeting minutes were released yesterday, and in the usual boilerplate were some interesting perspectives on inflation – more precisely, the lack of evidence for it. Some of the committee were a bit concerned about a threat of below target inflation. To be sure, there have been a number of positive economic signs since the start of the year (Scott Grannis has done a good job of summarizing them), but the Fed still sees a rather anemic recovery, with growth below the long term trend.
If this is really the case, why are Treasury bond yields rising so sharply? Inflation hawks will point to rising prices in oil (but don’t point out that natural gas is falling) and basic materials (forget falling agricultural commodities). The clue, as we have discussed before, is the strange swap spread action. It suggests the bond market in the near term isn’t worried so much about inflation, as credit risk in Treasuries. While the US is not in stellar fiscal shape, this seems overblown. Particularly given the sovereign credit risk in so many foreign bond markets.
I had flirted with the idea of reducing long bond holdings based purely on the technical sell indicators, but something is fishy here. I’m now more inclined to wait a bit and see what happens going into summer. That the Fed has exerted itself mightily to produce some inflation, and is concerned that it is failing, speaks volumes.