Jul 8, 2021 - Economy

What the bond market is signaling about inflation expectations

Data: FRED; Chart: Axios Visuals

The bond market just sent the strongest signals yet that investors believe inflation will ultimately be transitory.

What’s new: Key bond market yields like the 10-year Treasury hit new lows this week.

Why it matters: Yields have come down because investors are cycling out of the inflation trade.

  • "The market had not necessarily agreed with Powell’s forecast that inflation would be transitory. But now it’s coming around to that view," Grant Moyer, head of leveraged finance at MUFG Securities, tells Axios.

Details: The 10-year Treasury went as low as 1.25% on Thursday.

  • That’s a decline of more than 30 basis points since the June 16 Federal Reserve meeting — a sizable move in the world of Treasuries.

Meanwhile, ICE BofA's high yield bond index just dipped below 4% — for the first time.

Be smart: In an inflation trade, investors position themselves to benefit from an environment of rising prices. That means buying assets that will appreciate, like commodities, gold, real estate or even stocks.

  • Low-yielding fixed income is unattractive if you're preparing for lengthy inflation. But that’s one area investors are buying into now — piling into bonds and pushing down the yields.

What to watch: Inflation is still expected to remain somewhat elevated this year — to the tune of 3.4%, according to the Fed's latest estimates.

  • But some of the key inflation metrics are leveling off, rather than continuing to move higher — which could support the Fed's view that next year's inflation will come back down to around 2.1%.
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