Inflation and bonds are incompatible. Therefore, it is curious that the surge in inflation in the United States in 2021, accelerating at the fastest pace since the financial crisis of 2008, is met by buying bonds rather than selling them on Wall Street.
Inflation is a curse on government debt because it can undermine the fixed value of an asset, making coupon payments and principal repayments less valuable amid upward price pressures.
This is why evidence of inflation usually results in bonds being sold, resulting in higher yields that move in the opposite direction to prices.
Recently, however, benchmark debt yields have been holding the line and even declining in the face of what can be seen as growing confirmation of trickling inflation.
Indeed, the benchmark yield on 10-year Treasury bonds TMUBMUSD10Y,
was near the lowest level since early March at the end of Thursday, and the 30-year-old TMUBMUSD30Y,
Long bond yields were roughly their lowest from mid to late February, even as the cost of living rose in May, pushing inflation to a 13-year high of 5% as the economy struggles to recover from COVID. pandemic.
The government said Thursday that the consumer price index jumped 0.6% last month, the fourth-highest in a row. The rise in prices for used cars accounted for one third of the total increase in May. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% increase in CPI.
The fall in profitability probably helped the Dow Jones Industrial Average DJIA.
S&P 500 SPX index,
and composite index Nasdaq COMP,
rising to record highs on Thursday.
See: Inflation is on the rise. How high will he go? Check out the new MarketWatch tracker.
Here are a few reasons why yields were mostly falling rather than rising on long-term bonds:
Hungry for debt
The market is hungry for long-term debt.
Patrick Leary, chief market strategist and senior trader at Incapital, told MarketWatch that “it takes a ton of money to find a home … and Treasuries are the easiest thing they can buy.”
Recent data showed that the Federal Reserve’s short-term lending window was $ 503 billion in cash on Wednesday, a third consecutive record.
The Fed is offering 0% for this short-term loan, but banks and money market funds were willing to deposit money there because there are several other short-term investments available that do not actually charge a fee for depositing funds overnight.
Check: CPI vs. PCE controversy and other rabbit holes to avoid when considering inflation
Leary said banks and other institutions view holding Treasury bonds in the current environment as better than other assets, and the pursuit of yields is pushing investors towards 10- and 30-year bonds.
The CPI data is hot, but analysts believe that any rise in inflation will be short-term.
“I’m not saying this will be temporary, but the big numbers we’re seeing right now indicate bottlenecks and wide openings,” Gregory Faranello, head of US rates at AmeriVet Securities, told MarketWatch.
Incapital’s Leary also said the 52% rise in core CPI indicators for May reflected growth in used cars, vehicle insurance and airfare, with 64% of these factors contributing to stronger inflation in April.
So far, the Federal Reserve has no doubts that inflation will be temporary.
Faranello said many Treasury investors are expecting a sell-off in bonds, so the buying bias is exacerbating falling yields. Many traders assumed that further confirmation of inflation would lead to higher bond yields, but this did not happen and was instead seen as confirmation of the Federal Reserve’s argument for short-term price pressures.
“I really think positioning history is a big part of the story,” strategists at AmeriVet said.
The market is flooded with liquidity, at least in part due to the Fed’s $ 120 billion a month asset purchase program known as quantitative easing, or QE. The US central bank may discuss the quantitative easing cuts at its upcoming two-day policy meeting starting June 15 as inflation rises, but until then, its purchases of short-term and long-term bonds help flood the markets with easy money.