Why the Pain Trade in Rates is Still Higher

Yesterday was a bond market holiday. However, TLT (ETF for Treasuries) still traded.

In previous years I have seen bond bulls use this opportunity as a free pass of sorts to rally the ETF (as this ETF goes up, rates go down, generally speaking). But that did not happen yesterday on Veterans Day.

And now today we have TLT in the midst of breaking down from yet another bear flag as rates on the 10-Year Note push over 4.44%.  

All of this is happening as we head into tomorrow morning's CPI print. It was not too long ago that Fed Chair Powell stood at the podium and basically instructed all of us to focus on the labor market and essentially ignore inflation, since he surmised that the worst of inflation was over with and that growth would be the chief concern going forward. 

However, rates on the 10-Year Note are much higher than they were in mid-September, and gauges like Truflation are pointing to a resurgence in the inflation rate, which all of a sudden places a significant amount of pressure on tomorrow morning's CPI. Should we get a hot print it will disrupt many assumptions that equity investors and bond bulls have been making this year, namely that the worst of inflation is behind us. 

But without a deep recession (i.e. actual deflation, not disinflation with the rate of inflation falling) history suggests it is highly unlikely we see inflation go quietly into the night, or anything close to it. And that means inflation comes back with a vengeance, as the pain trade is (still) rates on the 10-Year headed back above 5%.