The Most Important Tweet You Will See This Month

Earlier, we tweeted out our chart of the day: the sharp rise in real interest rates in the United States, which has sparked a rally in the dollar, selloff in several currencies, and a selloff in bond markets all around the world.

The fact that real rates are what is driving the bond market sell-off is very telling, which leads us to the most important tweet you will see this month, from Izabella Kaminska over at FT Alphaville:

But why is this the most important tweet you will see all month?

The nominal interest rate – the yield on the 10-year U.S. Treasury bond, say, which has been flying higher in recent weeks as bonds have sold off – is the sum of real rates and inflation.

Pseudonymous macro strategist Barnejek points out that although real rates are rising, inflation expectations are not, which means the sell-off in the bond market is not about concerns over rising inflation due to expansionary Federal Reserve policy.

(That’s one of the favourite criticisms of the Fed: all of the “easy money” stimulus from quantitative easing will eventually unleash massive inflation in the U.S. economy.)

On the contrary, inflation remains very low – below even the Federal Reserve’s target.

In other words, the Fed is failing to create inflation.

Instead, the bond market sell-off seems to be driven by fears that the Fed will taper back monetary stimulus – driven in part by improving labour market data in the United States – which is causing the dollar to strengthen against other currencies and increasing the attractiveness of owning U.S. assets.

Thus, the rise in real rates suggests just the opposite: inflation really seems to be dead, now.

The upward move in U.S. real rates marks a sharp reversal from the long downward trend they have taken over the past several years. If this trend continues, it will be a game-changer, and we’re already seeing that play out in financial markets around the world.

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