Bond Trader Signaling Coming Inflation
The rout in the fixed-income arena deepened into the worst in 15 years as traders sounded the alarm on inflation amid speculation US President Elect Donald Trump’s spending pledges will boost economic growth.
Yields on benchmark 10-year US Treasuries posted their steepest back-to-back weekly increase since Y 2001, and a bond-market gauge of expectations for US consumer prices reached the highest in more than 18 months. Investors responded by demonstrating a solid appetite for a Treasury auction last week of US inflation-linked debt.
The leap in yields shows investors are bracing for the prospect that Donald Trump and a Republican-led Congress will push through some of his campaign pledges, which include tax cuts and investing as much as $1-T in infrastructure renewal.
The Treasury 10-year Note yield rose 58 bpts over the past 2 weeks, or 0.58%, to 2.35%, according to Bond Trader data. It was the biggest climb for a similar frame since Y 2001.
Inflation-protected debt has been a better bet in Y 2016. The securities, dubbed TIPS, have returned 4.8% this year as of 17 November Vs 1.5% for nominal Treasuries, based on the index data.
An $11-B sale of 10-year Treasury Inflation-Protected Securities (TIPS) on 17 November saw the highest direct bid since January, illustrating demand from a group that includes non-primary-dealer investors that place bids with the Treasury.
A bond-market measure of inflation expectations over the next decade peaked at 1.97% this week, the highest since April 2015. The Fed’s preferred gauge of inflation has not reached its 2% target in more than 4 years.
The forces rippling through financial markets may wind up limiting the bond market’s slide.
The USD has surged in the wake of Donald Trump’s victory as traders anticipated Fed rate increases, promising to keep down import prices. CME futures contracts indicate about a 100% probability of a rate hike at the Fed’s meeting in December.
US Treasuries have also cheapened up to the point where buyers may emerge.
The extra yield on US 10-year Notes over German equivalent bunds rose last week to the highest since Y 1989, according to data.
There’s also the prospect that some of Donald Trump’s proposals may spur volatility in financial markets that fuels demand for Treasuries as a safe haven.
The market is now focused on the inflationary pro-business aspects of what the incoming Republican administration should be able to deliver.
Have a terrific week.