Inflation on the Rise?

As the stock market continues to defy gravity and “melt up”, it is important not to ignore the bond market which may be at the beginning of a “melt down”. We will discuss some of the reasons this may be occurring. 

In 2017, the rhetoric to boost the economy from President Trump was very aggressive. Plans to boost infrastructure spending as well as a cut in taxes were discussed as ways to jump start the economy. Concerns were raised these actions would result in both higher rates and an increase in inflation.

However, 2017 turned out to be a very different story. Throughout last year, we saw little from Washington to stimulate growth. In fact, we didn’t see tax reform until the end of the year and no progress on rebuilding our infrastructure. Furthermore, unemployment remained low, and we saw little in terms of wage growth. The result was reporting from the Federal Reserve on core CPI (a measure of inflation) below their 2% target.

As we entered 2018, most signs indicated we could expect more of the same. The 10-year Treasury was still trading in the 2.2% to the 2.4% range. But as of Tuesday, the 10-year treasury yield moved above 2.5% for the first time since March 2017 (image above, MarketWatch). This may be a signal the economy is starting to accelerate. Both industrial production and retail sales are improving. Unemployment continues to drop, and real wages are moving higher. And the recent change to the tax code, may increase the Federal deficit.

Also, the Bank of Japan (BOJ) recently stated it will reduce its purchases of long-term government bonds. Foreign purchases of U.S. Treasuries have been a major factor in keeping rates low on our bonds. Lack of foreign buying may make rate increases necessary to attract investors to Treasury’s.

So, why all the concern?

As yields move higher, the price of bonds move lower.  Therefore, the price or value of the bonds in your portfolio may drop as rates move higher.  Should you be concerned, the answer is maybe. But with all the attention the stock market is receiving, it is easy to ignore what is happening in the bond market. Do so at your own peril, because inflation may be coming back.   


At Griffin Financial Advisors, LLC we have protected our clients from the potential rise in rates.  If you want more information on how to protect your portfolio, feel free to contact us. 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.

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