What’s up with the dollar and yields?

[signinlocker id=675]Up until recently, when yields when higher the dollar got bid. But this has now demonstrably changed: the broad dollar has been getting weaker in the face of rising USD rates.

My take is that the market is now confidently saying the Fed is going to find itself behind the curve, either by design or by accident. This is why this rally has much more of a reflationary feel to it when you look across sectors.

If you want to track the reflation trade, I think you can boil it down to these two charts:

Nominal 5 yr UST yield over the last 6 months
5 yr TIP (real) yield over the last 6 months

For the past 2-3 weeks US 5 year nominal yields climbed higher, while 5 year real yields fell (BEs of course, rose). This is a potentially important change in correlation.

Three investment inferences

1.  The dollar is responding to the real rate and not the nominal rate until further notice.

2.   The spread in real-to-nominal and the general price action are saying reflation trade.

3.   At some point the reflation trade will overshoot, and the correlation of these two yields will likely be a good ‘tell’ when it does.[/signinlocker]

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