Bond Market Noise Masks a Golden Buying Opportunity

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Bonds Analysis by Michael Lebowitz covering: . Read Michael Lebowitz's latest article on Investing.com

Treasury yield levels are overwhelmingly a function of inflation. However, in the short run, a plethora of influences can explain deviations between yields and inflation. These factors, which we call noise, are significant for short-term traders but can hide tremendous opportunities for long-term investors.

The signal is the meaningful information that you’re actually trying to detect. The noise is the random, unwanted variation or fluctuation that interferes with the signal.Market noise is the primary determinant of hour-to-hour and day-to-day price changes. While it is very important for short-term direction, its influence often wanes quickly.

However, oil-driven inflationary concerns may arise if the war proliferates to Iran or other oil-producing countries. Again, this will show up in our inflation signal.False narratives are meaningless noise. These are stories market pundits tell to justify market actions. False narratives can certainly move the bond market in the short term, but their shelf life is often minimal.Listening to the media or Twitter, one might think Treasury debt issuance over the last six months is off the charts.

The regression trend line in the scatter plot is defined by the circled formula. It calculates where yields should be based on the Cleveland Fed Index.

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