The US government bond market is signalling that the Federal Reserve will be able to tame inflation in coming years without snuffing out growth in the world’s biggest economy.
That would mark a significant fall from the 7 per cent rate recorded in December. Longer term break-even rates suggest that markets are expecting the Fed to succeed in pushing inflation back towards its 2 per cent target.The rising yields, coupled with steady inflation expectations, have pushed returns bond investors can expect to earn after inflation is taken into account sharply higher since the end of last year.
In 2021, the US economy rebounded from the historic pandemic-induced recession by growing at the fastest annual pace since 1984. Vaccines, a return to work and robust federal stimulus have all bolstered the rebound. But until recently, that had not been reflected in the Treasury market. The market responded by sending yields on US Treasuries jumping, with the 10-year yield hitting its highest level since January 2020.
“Either the entire inflation market hasn’t gotten the memo or they have got the memo and the memo says inflation is going to come back to normal by the end of the year,” Chris McReynolds, head of US inflation trading atYields on longer dated break-evens are “very well contained. There’s no thought of sustained levels of inflation”, he added.
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