Submitted by Yves Lamoureux of Blackmont Capital
There's something happenening here!
What it is ain’t exactly clear. There’s a man with a gun over there.
Telling me I got to beware. I think it’s time we stop, children, what’s
that sound. Everybody look what’s going down.
And what’s going down is oil. After our recent warnings on gold, the yen and the carry trade unwinding here comes the energy sector. A big part of inflationary expectations that will get unwound too.
For the last two decades the trend of inflation has been easing. The same as applied to the general trend of the percentage growth in the GDP. One big problem for managers is to drive looking forward rather than manage backward. Oil as an echo bubble will quickly fade away and will bring better prospect at anchoring inflation expectations.
Armed with some of the best real return on treasuries for years, we decided to study the behavior of oil to bonds. We have used the ishares Barclays 20 years ETF as our bond proxy to compare to crude oil.
It becomes evident that in general when oil drops you will see an upturn in the price of the bonds. That’s in theory what you would expect. I also checked the opposite where oil rallied. In fact the TLT used as a proxy does go down and confirms the behavior in both direction.
I believe that with lower sustained inflation expectations a lower term premium will be required for holding bonds.
We are in fact headed back in term structure to the 50’s and 60’s……
Yves Lamoureux, Investment Advisor, Blackmont Capital inc.
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