Avoid Treasuries until CPI nowcast breaks 2%
Investors should avoid holding US Treasuries until daily CPI nowcast estimates fall below 2%, as near-term inflation shocks from energy will continue to pressure yields.
The argument
The guest argued that the immediate mechanical effect of rising oil prices pushes up inflation breakevens and rate expectations, making buying Treasuries now akin to catching a falling knife. While demand destruction from high energy prices will eventually be disinflationary (which is bullish for Treasuries), both forces are best captured by waiting for a daily inflation nowcast to break below 2% before allocating.
The thesis, stress-tested
✓ What validates it
- ✓Daily CPI nowcast estimates breaking and sustaining below the 2% threshold
- ✓A stabilization or decline in global energy prices
▸ Risks discussed
- ▸A sudden collapse in oil prices could cause yields to drop rapidly before the nowcast registers the change
- ▸The Fed could prioritize growth over inflation, capping yields artificially
Hear it yourself
"But the the the inflation shock coming in the form of these spikes in oil prices are a huge, huge inflationary pressure. And if these are sustained, they are eventually gonna create demand destruction, which meaningfully increases the probabilities of us going into a slowdown and perhaps even a contraction of output."
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