Have We Broken the Long-Term Rules on Treasuries and Inflation?

This past year (2025) we seemingly have changed some rules regarding the relationships between U.S. Treasuries, inflation, and Treasury prices. Treasuries have always been priced according to interest rates in the open market and in line with inflation. These factors have always been in sync when determining bond prices and inflation. In economic forecasting, we try to project inflation in order to project bond prices and back and forth. We base our long-term price forecasting on inflation. In the year just passed, we did so again only to find our inflation projection was “spot on,” while bond prices ended surprisingly lower. A correlation change between bond rates and inflation has taken place. Are Treasuries being discounted differently, so we cannot use inflation to price bonds? Are the low prices for Treasuries reflecting a different discount because of other factors, i.e., eroding Government quality of credit? Is the Federal Reserve creating a credit issue for bonds? Is this a changing relationship between the two, or is it simply a delay that will bring both back into line at a later date?

Is it possible that true inflation is being delayed and really should be a higher number? After all, we’ve had a big commodity price move in copper, gold, silver, and palladium, along with some relief in oil – which I referenced in my last piece “Drill Baby Drill.” We don’t see any inflationary spike ahead, but that doesn’t mean it’s not there. It’s going to take a watchful eye as we get into the year. It is terribly important that we correct the correlations so that the recovery can be properly read and interpreted and it’s not guesswork. The Fed is also confusing matters because it is trying to price home mortgages at a more satisfactory level, but you can’t price money differently for different purposes. With money, it’s “one size fits all.” Could the Fed’s influence be causing the change in correlation between inflation, interest rates, and bond prices?

Looking ahead, things seem otherwise to be O.K. We’re just waiting on a few critical issues such as the Supreme Court’s Ruling on Tariffs, the Russia/Ukrainian War, and everything related to China. The election in the U.S. is critical, and I feel at this point that Trump may be in trouble, creating a confused political process unless the numbers correct themselves. Let’s hope I’m wrong and we have political clarity this election season.

At Cadinha & Co., we will also be making some internal adjustments this year. Historically, while our Investment Committee is responsible for all investment decisions, each portfolio manager has been responsible for administering the customized portion of our portfolio management decisions for each of their clients. As many of you know, I have proudly carried that responsibility for decades. However, age has brought some vision challenges due to macular degeneration, and it has become clear that it’s time to gradually transition certain administrative responsibilities to other capable hands.

Going forward, Kalei—our CEO and President—and my granddaughter, Mahina, will begin taking on more of the day-to-day work involved in administering the customized portfolio management portion of our investment advice for my direct clients. As we specialize in succession planning for our clients, we have also built upon our original succession from generation one to generation two by beginning the training of generation three. Mahina holds a bachelor’s degree and an MBA in Finance from Creighton University and is currently working toward her Certified Financial Planner designation. Both Kalei and Mahina are exceptionally capable. They can cover ground more quickly than an old man with tired eyes.

That said, I’m not going anywhere. After 58 years in this business, I still see things in the markets that only experience can teach, and I still love what I do. I also have my own financial matters to keep an eye on, so instead of stepping away completely, I’m choosing to strengthen our team by adding more talent around me. I believe this will only improve the work we do for you.

And don’t worry—they still have to “put up” with me in the investment meetings as I continue in my current capacity of Chief Strategist.

Thank you for your trust and loyalty over the years. It truly means a great deal to me.