Bond Market’s Inflation Bets Reach Highest in More Than a Decade
(Bloomberg) -- Bond traders are boosting expectations for U.S. inflation to levels not seen in over a decade amid concern supply-chain bottlenecks and resurgent consumer demand will keep lifting the cost of goods and services.
The breakeven rate for five-year Treasury inflation-protected securities surged Thursday to the highest since the maturity was reintroduced in 2004. The move was particularly striking as it coincided with the biggest-ever auction of the tenor. The $19 billion offering drew a record-low yield of minus 1.685%, below where it was trading before the auction, a sign that demand exceeded dealers’ expectations.
Breakeven inflation rates for TIPS are rising as U.S. Treasury yields climb, while demand for inflation-protected notes and bonds has kept their yields relatively stable. The difference in yield represents the inflation rate needed to equalize their returns.
For five-year maturities, the regular Treasury note’s yield topped 1.2% Thursday, the highest level since February 2020. The difference between the five-year TIPS yield and a comparable-maturity nominal yield reached 2.92 percentage points, the market’s proxy for the annual inflation rate for the next half-decade. Ten- and 30-year breakeven inflation rates reached multiyear highs this week as well.
Investors are protecting against the risk of persistently elevated inflation in the wake of the Federal Reserve’s new approach of letting inflation run hot as the economy recovers from the pandemic. Crude oil futures fell from a seven-year high Thursday, and the Bloomberg Commodity Index dipped from a six-year high.
Inflation’s path “has become more uncertain lately, and over that five-year time horizon it’s going to remain uncertain,” Tiffany Wilding, chief U.S. economist at Pacific Investment Management Co., said on Bloomberg Television. But inflation faces both upside and downside risks, and “the market’s still giving Fed a lot of credibility around its longer-term inflation goals.”
The five-year breakeven rate compares with the annual growth rate for the consumer price index of 5.4% in September. Breakeven rates have risen with oil and gasoline futures in recent weeks, after they ebbed from their May highs as central bank officials in subsequent months said inflation trends warranted a withdrawal of accommodation. The Fed is expected to start tapering its asset purchases as soon as next month.
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