• 486 days Will The ECB Continue To Hike Rates?
  • 486 days Forbes: Aramco Remains Largest Company In The Middle East
  • 488 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 888 days Could Crypto Overtake Traditional Investment?
  • 893 days Americans Still Quitting Jobs At Record Pace
  • 895 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 898 days Is The Dollar Too Strong?
  • 898 days Big Tech Disappoints Investors on Earnings Calls
  • 899 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 901 days China Is Quietly Trying To Distance Itself From Russia
  • 901 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 905 days Crypto Investors Won Big In 2021
  • 905 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 906 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 908 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 909 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 912 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 913 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 913 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 915 days Are NFTs About To Take Over Gaming?
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Michael Pento

Michael Pento

Delta Global

With more than 16 years of industry experience, Michael Pento acts as chief economist for Delta Global Advisors and is a contributing writer for GreenFaucet.com.…

Contact Author

  1. Home
  2. Markets
  3. Other

Treasuries vs. the CRB

From 1980 until the spring of 2002, 10-year Treasury note yields held a positive correlation with the CRB index. Since 2002, however, there has been a dramatic divergence between Treasury yields and commodity prices. This trend is unsustainable in the long term because bond yields must eventually reflect rising inflationary pressures and at some point offer a positive real after-tax return.

There can be only two possible conclusions reached when viewing this disparity, shown in the chart below. One is that commodity prices are no longer an indication of inflationary pressures, a ridiculous contention that cannot be taken seriously. After all, the CRB Index contains 19 commodities that include precious metals, base metals, agriculture and energy, broad measures of the pricing pressures that exist in today's economy.

The other conclusion-the right one, in my estimation-is that Treasury securities are grossly overvalued.


Source: Bloomberg

[The 15-year chart above shows the close relationship that existed between 10-year yields (shown above in white) and the CRB index (green) from November 1993 into 2002. The decoupling since that time can clearly be seen here.]

Today's disparity between rising bond prices and inflation are likely the result of bondholders' fears of holding any debt not backed by the full faith and credit of the U.S. Government, but this is a not a disparity that should be able to continue indefinitely. After all, even according to the "official" inflation measure-the Consumer Price Index, which likely understates inflation-buyers of 10-year treasuries are currently getting a negative real return to the tune of nearly a full 1%!

History is clear that we should look for a reversion to the mean, either via a dramatic downward break in commodity prices, a sharp increase in Treasury bond yields or some combination of the two. It is my belief that the continued actions undertaken by the Fed to re-liquefy the banking sector will engender a further increase in inflation pressures and send commodity prices higher still.

As a result, the most likely outcome in this scenario is for a collapse in bond prices as opposed to a dramatic retrenchment in commodities.

In the current economic environment, rising interest rates would exacerbate the decline in home prices and restrict credit availability even further, thus the Fed will be unable to hike rates until any economic recovery is well underway. So, despite the incessant claims over the last few days that commodities are "in a bubble," the risk of falling bond prices far outweighs the risk of falling commodity prices.

While it may be true that commodities are a little overbought on a short-term basis, today's real bubble exists in the bond market.

 

Back to homepage

Leave a comment

Leave a comment