![]() ![]() Since the middle of last year, for example, the CESI has been weakening as the economy’s initial, unexpectedly strong recovery from the coronavirus pandemic began to moderate. We think that relationship can be one tool in understanding where bond yields might be heading. ![]() Nevertheless, the analysis offers positive confirmation that there is a relationship between the two variables. Yields often move more or less than our model might suggest. ![]() Over time, lots of things affect Treasury yields, and the CESI certainly doesn’t explain the majority of the move in yields. In the chart below, we modeled the three-month change in the 10-Year Treasury yield (in basis points) based on the level of the CESI. Positive surprises or disappointments can affect investors’ willingness to buy assets, and statistical analysis confirms the relationship. Looking forward, the CESI now suggests bond yields could be relatively stable in the near term. A review of the recent trend in the CESI shows it pointed to a drop in bond yields over the summer, despite investors’ growing concerns about rising inflation and Federal Reserve interest-rate hikes. In this class, we would include the Citigroup Economic Surprise Index (CESI), which tracks whether a core set of economic data series has been coming in under expectations, at expectations, or over expectations. Other indicators are indexes composed of multiple data points, and they can point to future financial market performance as well. Some indicators are strongly correlated by themselves, with performance yardsticks like stock prices, dividend yields, or bond yields. We publish asset allocation thoughts on a weekly basis in this report, updating the report every Friday, along with an accompanying podcast.Īs market strategists, we’re always on the lookout for reliable indicators of future financial market performance wherever we can find them. Confluence Investment Management offers various asset allocation products which are managed using “top down,” or macro, analysis. ![]()
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