Core government debt rallied ahead of Thursday’s inflation data release, with traders betting that signs of an overheating U.S. economy would be offset by assurances that the Federal Reserve would continue with supportive monetary policies.
The yield on 10-year Treasuries fell 0.05 percentage points to 1.49%, its second lowest level in three months, according to data from Refinitiv, while European government yields also fell.
Economists expect US consumer prices, excluding volatile food and energy costs, to rise 3.5% in May, their biggest year-on-year jump since 1993. Data on Wednesday already showed that Chinese factory outlet prices had risen last month at the fastest pace since the financial crisis.
Rising inflation has raised fears of rising interest rates that would make fixed income securities such as government bonds less attractive. But the US central bank, which is meeting next week, has maintained that episodes of rising prices are a transient effect of reopening industries after coronavirus shutdowns.
“Bonds are rallying ahead of meetings where the Fed will say something like that again,” said Randeep Somel, portfolio manager at M&G.
Some senior Fed officials, such as Vice President Randal Quarles, have called for talks to cut the $ 120 billion in monthly central bank bond purchases that have supported markets during the pandemic. Another, Richard Clarida, argued that the main US lending rate should remain at an all time high until the country reaches maximum employment.
At the European Central Bank’s monthly meeting on Thursday, its president, Christine Lagarde, is also expected to declare that the bloc still needs a supportive monetary policy.
“While we expect President Lagarde to be cautiously optimistic. . . we also expect her to point out that the recent increase in price pressures will likely be transient, ”said Daiwa economist Chris Scicluna.
The Italian 10-year bond yield fell 0.03 percentage point to 0.83% on Wednesday, while the equivalent German Bund yield fell 0.02 percentage point to minus 0.25%.
The move follows a liquidation of government bonds earlier this year, prompted by expectations that US President Joe Biden’s multibillion-dollar stimulus package would fuel inflation.
“Shorts are now pulling out of bond markets,” said Esty Dwek, head of global market strategy at Natixis, referring to transactions that sought to profit from falling stock prices. “They have integrated strong inflation growth very quickly,” she added, “but we won’t know if the Fed is right or wrong until the end of the year.”
The US 10-year breakeven inflation rate, a measure of inflation expectations, fell 0.05 percentage point to 2.32 percent.
Stock markets were gloomy Wednesday. Wall Street’s S&P 500 Index, which has been trading in a narrow range for weeks, and the technology-focused Nasdaq Composite edged down at the end of the trading day, closing down 0.2% respectively. and 0.1%.
In Europe, travel-related actions have rallied around reports that the Biden administration has taken the first step towards easing travel bans linked to coronaviruses. The region-wide Stoxx Europe 600, which hit all-time highs earlier this week, set a new record after climbing 0.1%.
In foreign currencies, the British pound lost 0.3% against the dollar to $ 1.4111, while the greenback edged up 0.1% against a basket of peers.
Brent crude, the international benchmark for oil, fell 0.3% to $ 72 a barrel.
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