Bond market becomes battleground for fight over inflation

Brian Cheung

Inflation is on the rise, but bond markets are shrugging off the higher readings.

On Thursday morning, fresh data from the Bureau of Labor Statistics showed prices across the board increasing by 5.0% year-over-year, the fastest pace for the Consumer Price Index since August 2008.

U.S. Treasuries barely flinched in the hours following the data release, with the U.S. 10-year bond (^TNX) rising only a couple basis points to 1.51% and the 30-year bond (^TYX) rising about 3 basis points to 2.20%.

The CPI print appeared to do little in reversing the recent trend of declining yields for longer-dated U.S government bonds. A month ago, the U.S. 10-year was trading at a yield of about 1.70% with the 30-year trading at 2.42%.

Generally, concerns over higher inflation coincide with higher bond yields. As a proxy for interest rates, bond yields tend to price in the expectation of interest rate hikes from the Federal Reserve when inflation raises the spectre of runaway prices.

ING’s regional head of research Padhraic Garvey said that “bond market goggles” show a view of no inflation in the economy.

“Leave them on and look hard enough and a tint of distant deflation dawns. That's one version of where we are,” Garvey wrote Thursday.

Bond market battle ensues

Others disagree, arguing that the bond yields are too low given the inflation risk.

Chris Rupkey, chief economist at Fwdbonds, said that Federal Reserve officials are at risk of having to pump the brakes on its aggressive monetary stimulus.

“Inflation isn’t normal, it’s way past that now, it is quickly spreading beyond the Fed’s control. Sell bonds,” Rupkey wrote Thursday.

The central bank has held short-term interest rates at near-zero since the depths of the pandemic, in addition to snatching up trillions in mortgage-backed securities and U.S. Treasuries.

The Fed has recently hinted at kicking off discussions on paring back the pace of those asset purchases, the first step in pulling back its easy money policies.

But Fed officials have pointed to labor market damage as reason to keep their policies accommodative. May jobs data showed the economy still 7.6 million jobs short of pre-pandemic levels.

Julian Emanuel, a managing director at BTIG, told Yahoo Finance Thursday that the bond market may be waiting for the millions of the unemployed to return to work before getting a clearer picture on where prices really are.

“The fact that we’re going sideways [on bond yields] means the market does not know, really does not know. And may not know until later this summer,” Emanuel said.

The Fed’s next policy announcement is expected June 16.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit

Advertisement