US Bond Traders’ Inflation Outlook Hits Record High as Oil Recovers

US bond investors’ short-term inflation expectations jumped to a record high as oil, natural gas and coal surged, and geopolitical concerns added to concerns about already elevated price pressures. .

The two-year breakeven rates in United States of Treasury inflation-protected securities, or the difference between those yields and those of bonds Treasury rates rose as much as nine basis points to about 3.75%, the highest since Bloomberg began compiling the data in 2004. The five-year gauge rose six basis points to 2.99%. The expectations Longer-term inflation rates rose less, with the 10-year breakeven rate rising four basis points to 2.48%. It is well below the multi-year high of 2.78% set in November.

The Petroleum Brent approached $100 a barrel after Russian President Vladimir Putin signed an order to send what he called “peacekeeping forces” to the two breakaway areas of Ukraine that he officially recognized on Monday. The central bankers of United States they face the highest inflation in 40 years and will get more information on how their preferred gauge of price pressures performed in January later this week. Consumer confidence fell in February to its lowest level since September, as expectations growth and the financial outlook softened amid high inflation.

“It is a stagflationary shock”, said James Athey, chief investment officer at Aberdeen Asset Management. “The Russian situation is largely a contradictory influence on the bonds of the Treasury”.

The highest prices of Petroleum they mean a more aggressive Federal Reserve, higher costs of living and lower growth, which should lead to higher front-end yields and lower long-term returns, he said.

The equilibrium curve has been inverted since last year, which means investors expect elevated inflation in the coming years to eventually fade. The five-year inflation gauge is 52 basis points above the 10-year rate, an all-time high.

The reference yields ofs bonds 10-year Treasury yields rose about 1 basis point to 1.95%, compared with 2.06% set last week, which was the highest level since 2019. Two-year yields rose the most, rising 5 points. basic at 1.52%. The move reduced the spread between the two yields to 42 basis points.

short-term rates of United States face a bid test in the form of a monthly auction of bonds to two years at 1 pm Eastern time. It is likely to return around 1.50%, the highest since December 2019. The January auction drew 0.99%, and a rise of that magnitude has not occurred since 2004.

Swaps traders noted that the latest rally has done little to alter the assumption that the Fed will raise interest rates at most of the seven remaining meetings in 2022. A 25 basis point hike next month is fully priced in. , and the markets they see more than a 20% chance of a 50 basis point move at the meeting. While New York Fed President John Williams leaned toward a half-point hike, Fed Governor Michelle Bowman suggested such a move could be on the table if incoming inflation readings are too tall.

Fed official suggests half-point hike in March on the table if data heats up.

The volatility in market of bonds of United States has rebounded in February as expectations of a central bank stimulus withdrawal collide with safe-haven offers amid escalating tensions in Ukraine. Treasury bonds had lost 3% this year, already surpassing the 2.3% drop in all of 2021.