10-year Bond Price: Inflation or Recession?

At the crossroad of Inflation and Recession but direction still uncertain

Each day, we wake up in the morning to read about more new policies and actions by the Trump Administration. Whether its political, economic or social, these policies and actions have put the financial markets into a coma. The only certainty is uncertainty. To have a more accurate analysis of equities, forex or commodities, study the bond market. The yield on the 10-yr Treasury will at some point in the near future give the signal on whether the US will enter an inflationary or recessionary period. At the point in time, although yields have been rising (bond price falling) , the bond price has not stayed below the landmark 4.2 (which would indicate an inflationary environment) for long. Neither has the price risen to stay above 4.4 for which would indicate a recessionary environment.

At the current moment, as seen by more days the price has fallen below 4.2 when compared to the days above 4.4, the tilt is that inflation is more probable than recession.

However, we all know that inflation eventually leads to a recession if left unchecked and high interest rates and high consumer prices take their toll on both businesses and consumers.

Here is our models 1-20 days ahead autoregressive forecast of bond price trend. The downslope is gradual.

Another sign of inflation rather than recession is the fitted ARIMA p,d,q (2,1,2) series as shown below. The Blue forecast is below the Red actual.