Treasuries are selling-off again today; the benchmark 10-year Yield (TNX.X) is trading near ten month highs. The growing expectations for a hike in short-term rates is the fuel behind the momentum. Indeed, bond traders remain on the defensive as the market discounts a rise in short-term rates by May or June. The bond market is currently discounting an 80 percent chance of a 25 basis point hike in rates by the first week of May.
This morning's housing data may be lending to the inflationary fears. Although February's existing home sales number was below January's record setting rate, the continued strength of the housing market could be a source of inflationary fears. The housing sector, as measured by the Dow Jones U.S. Home Construction Index ($DJUSHB), responded to this morning's data as if rates will rise, thus snuffing demand for mortgages.
A separate data release revealed an under supply of gasoline, resulting in the recent rise of prices at the pump. The price of crude is modestly lower today, however, but still relatively higher in relation to recent lows. The spot price for a barrel of crude was just under $25 this morning. Countering the weakness in the commodity, Oil Service (OSX.X) shares are trending higher again. The OSX.X was better by about 1.50 percent at the time of writing.
Meanwhile, the Gold and Silver Index (XAU.X) ticked to a new 52-week high this morning. The commodity traded within a few ticks of the magical $300 level, higher by about 50 cents per ounce. The rally in the metal in conjunction with a sell-off in Treasuries reveals a market that is fearful of inflation. If Treasuries were rallying along with gold, then we might conclude that the market is positioning defensively. But that's not the case today.
All That Glitters...
Inflation itself is not such a bad thing for the economy and market because it could lead to better margins for everything from denim pants to high-end routers. But inflation may not be the best ingredient at this point in the very delicate recovery that appears to be underway. Rising short-term rates, induced by inflation, would raise borrowing costs for corporations and consumers, potentially prematurely snuffing out end demand. It's a delicate line that Greenspan & Co. is walking. The market could ease any inflation pressure by raising long-term rates, which is already underway. The worst case scenario for the market and economy would be a rapid rise in short-term rates from here. Fortunately, the Fed has a lot of room to the upside to work with, but it remains a matter of the velocity at which inflation returns and the corresponding velocity of short-term rates.