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The great bond selloff signals concerns about inflation

Data: U.S. Treasury; Chart: Axios Visuals

Treasury yields jolted higher last week as investors bailed out of safe-haven U.S. government debt, pushing yields up by the most in one week since June 2013. The selloff that began Sept. 4 sent yields on the benchmark 10-year Treasury note from 1.45% to 1.90% in less than 2 weeks.

Why it matters: While some have credited the spike in Treasury yields to renewed faith in the U.S. economy, the market is likely more worried about a return of inflation — a far greater ill for fixed income investors as it corrodes the value of already issued bonds.

What's happening: Readings on data that contribute to inflation have consistently surprised on the upside in the past few months, even as U.S. GDP estimates for the third and fourth quarters have trended below 2% and expectations for global growth have been pushed downward.

  • U.S. retail sales rose 0.4% in August after a particularly impressive 0.8% rise in July. Both readings were well above consensus estimates.
  • The core consumer price index, which measures inflation excluding volatile food and energy items, rose 0.3% in August from July and 2.4% from a year earlier, the biggest jump in more than a decade, according to St. Louis Fed data.
  • August's U.S. nonfarm payrolls report missed expectations for job gains, but average hourly earnings increased by 0.4% for the month and 3.2% from a year earlier, with both numbers beating expectations.
  • The share of people who chose to leave their jobs, known as the quits rate, also rose for the first time in a year to the highest since 2001. As people usually leave for higher-paying jobs, the quits rate can be another indicator of inflation.

Of note: Investors have continued to pour money into money market funds, showing the desire for safe-haven assets has not diminished.

Between the lines: Growing worries about a bond bubble also have spooked bond investors in recent weeks, as money managers, including Guggenheim's Scott Minerd who oversees $240 billion of assets, have sounded the alarm.

  • Former Rep. Ron Paul even jumped on the bond bear train this weekend, declaring in a CNBC interview that the world is in "the biggest bond bubble in history, and it’s going to burst.”

The big picture: The latest 2-week trade war truce between the U.S. and China has provided cover for bullish investors to buy stocks, but will make little difference to the current downward trajectory of U.S. and global economic growth. Inflation, on the other hand, appears to be moving higher in a way it has not in some time.