After worrying about the prospect of deflation, investors this week were struck by a combination of economic reports suggesting such concerns were being exaggerated.
As a result, the bond market’s expectations for the prices of goods and services hit an almost six-month high.
The upward tremor comes despite a COVID-19 pandemic that has caused massive bankruptcies, widespread unemployment and a slow economic recovery.
The 10-year break-even rate, or what buyers of Inflation-Protected Treasury Securities (TIPs) expect in consumer prices over the next decade, hit 1.72% on Thursday, its rate the highest since February and well above 0.50%. bottom leaded in mid-March. He finally finished at 1.67%.
The equilibrium inflation rates for TIPs do a reasonable job of tracking the trajectory of consumer prices, according to the Bureau of Labor Statistics.
This surge in inflation expectations also spilled over into ordinary treasury bill trading, which is vulnerable to intensifying price pressures.
The yield of the 10-year note TMUBMUSD10Y,
fell back above 0.70% on Thursday, while the 30-year bond yield climbed 5.7 basis points to 1.422%. Bond prices move inversely with yields.
Consumer prices, producer prices and import prices all surged in July, beating analysts’ still gloomy forecasts of a full recovery in inflation as the pandemic remains unresolved.
“There are signs that inflation is at an all-time low,” Esty Dwek, head of global macroeconomic strategy at Natixis Investment Managers, said in an interview.
Morgan Stanley analysts said the 0.6% increase in consumer prices in July bolstered their expectations that personal consumption spending could temporarily exceed 2% next year, a feat rarely seen in the world. post-2008 economic context.
They advised investors to bet on widening the yield spreads between short and long-term bond yields by simultaneously buying inflation-protected 5-year Treasury securities and shorting the 30-year bond. .
But some say the recent reflation talks show how too quick some investors have been to change their mind amid the uncertainty surrounding the ultimate economic impact of the COVID-19 pandemic.
“Traders and economists are eager to rush to draw conclusions on fundamental debates when lessons from the pandemic argue that rushed conclusions require constant revisions,” said Jim Vogel, interest rate strategist at FHN Financial , in a note.
Others argue that break-even inflation expectations may not offer real insight into how bond investors think inflation will develop. Indeed, transactions in inflation-protected Treasury securities remain slim, so even a modest increase in demand can raise equilibrium rates.
“You only need a few asset managers to buy TIPs and you will see a significant increase in inflation expectations,” Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, said in an interview.
The iShares TIPS Bond TIP exchange traded fund,
is up 7.7% since the start of the year.