Real term yields are the decisive variable for the economy. And real yields care about two things: the expected course of short-term interest rates, and systemic risk. US TIPS (Treasury-Inflation Protected Securities) are the safe-harbor investment par excellence, along with gold. And it is no surprise that TIPS trade like gold.

The accompanying chart shows 15-minute interval data during the year to date. There is a consistent linear relationship between gold and TIPS. And there are a lot of linear relationships between the expected fed funds rate 12 months ahead (the price of one-year funds futures).

With systemic risk fading in Europe (collapse of populism in Italy, the new Franco-German economic entente), and China risk at a minimum, the price of insurance against systemic risk ought to fall. That makes us better sellers of bonds. But we wouldn’t be sellers before this morning’s CPI inflation number. The inflation component of bond yields has been falling and could fall a bit more.