Back on February 25, Treasury auctioned 7-year notes and it did not go (as) well. Maybe you remember us saying something about it, and then again and again and… The prevailing view then – and now – was reflation hadn’t just accelerated, the true inflation long-promised by so much “money printing” (or at least by those who equate bank reserves with this) combined with direct fiscal integration was finally at hand.

Not just big, together authorities may have overdone it this time.

Reflation would quickly morph into inflation spoiling low US Treasury yields leading to the also-predicted BOND ROUT!!!! Here was seemingly a solid indication in favor of each of these things. Sky high, supposedly, inflation potential was what had chucked the late February 7s auction.


Treasury has since conducted three more 7-year note offerings and – you know where I’m going with this – each one more successful than the last. And that last one took place just yesterday with essentially blockbuster results in every category.

It was another $62 billion (net) on sale only this time the government ended up with just shy of $150 billion in bids for it (BTC of 2.41), compared to $127 billion in bids (BTC 2.05) back on Feb 25. That’s a substantial change in mostly dealers. The yields have been higher, but yesterday were back to within 10 bps.

The reflation-is-inflation story can’t account for anything here. Had Feb 25’s auction been the start of reflation-is-now-inflation, then the bond selloff would’ve accelerated, too. On the contrary, since the one auction on Feb 25 sticks out there must’ve been something else going on to explain why this continues to stand as the lone outlier.

Furthermore, in between these 7s auctions as well as every other maturity, the crazy data has continued to come in hard and fast. There was monster March payrolls, unearthly retail sales, and then the April CPI and its core reaching back as if the Great Inflation itself really was upon us.


Today, the Fed’s preferred PCE Deflator and its core, the latter which was the highest in nearly thirty years, put in with the CPI. And the core’s the one the Fed pays attention to most (therefore the public is meant to, too).

Bond yields that appeared to have been on a path toward 1977, however, have obviously instead stuck around as if none of those things had happened; or perhaps that none of those things matter beyond the here and now. This despite the Feb 25 auction going wrong. Or is it because the Feb 25 auction and only the Fed 25 auction went wrong?

That last part is factually true, which then continues a quarter of a year later to press forward on an entirely different basis than inflation, even reflation. Feb 24 meant Fedwire, thus risks of dealer problems spilling over upon any more including tiny disruptions into greater negative, deflationary consequences. That’s not just UST auctions, but now T-bills, secondary LT UST prices, and even the Fed’s frenzied RRP window.

We’ve seen all these things (dealers/collateral) happen before, repeatedly, so risks are higher than they otherwise might seem from the perspective of the CPI or PCE Deflator, core and headline.

The impressive April inflation numbers pale by comparison, especially given their makeup. The BEA reported today that the headline PCE Deflator rose 3.58% year-over-year, like the CPI the highest in more than a decade, but each were compared to their respective lowest point of last year’s recession. Substantial base effects have boosted these figures.

I know people are tired of hearing about these statistical excuses, yet in the case of the core PCE the impact from them is plainly obvious (see: above). Stripping food and energy prices from the PCE basket, the core year-over-year rate was 3.06%, the highest since time began (not quite, but that’s how it has been described).

Compared to January 2020, however, the core rate rose at just a 2.15% annualized clip which isn’t any different than previous reflationary periods. That’s really the point here; the inflation case rests – it has to – on the idea that this year and beyond is somehow very, very different from past years.

It’s not.

By themselves, recent acceleration in consumer prices don’t tell us much one way or the other; will these continue to accelerate as many claim, or are they made up of, as even Jay Powell and the FOMC believes, transitory factors including supply problems, temporary artificial government (fiscal) intervention, and, most of all, tremendous uncertainty about the state of the economy once the smoke of Uncle Sam’s helicopter exhaust and the pandemic itself finally clears.

We’ve already gone through this once before, too, just last year. A sudden multi-month swing upward in consumer prices based on reopening and subsidies last summer that “unexpectedly” swung downward again once those subsided.

The whole thing boils down to slack (and what causes it, which we don’t need to get into here). The economy right now is improving, even rebounding as more reopening gets done, but with such a long way still to go and having squandered so much time just to get this far once the latest sugar high wears off, what will the CPI look like this summer?

Maybe too much like last summer.

If there is any difference this time than those other previous reflations leading to inflation hysterias, it’s that, for once, the Federal Reserve is finally on the same side as the bond market. That’s what the yields, auctions, RRP, etc., are all saying – transitory inflation, which isn’t actually inflation, because the disinflation if not deflationary probabilities remain equally as elevated as before 2020, and not really that much diminished since 2020 (why the reflation selloff so far had been so underwhelming).

More than a year after the crash, we’re still waiting for the answer to, then what? You’d think by now given everything going right, vaccines, stimulus, etc., this wouldn’t even need to be asked. And that is precisely why it is being priced the way it is.