Bonds Indicate U.S. Inflation Will Pick Up Rapidly When It Comes

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As the outlook for inflation rises, the message from the bond market is that the cost of living will pick up quickly.

The difference between yields on U.S. two-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, climbed to 1.52 percentage points Monday, the highest level since August. While the figure has risen from below zero as recently as January, it’s still less than the Federal Reserve’s inflation target of 2 percent.

“It’s been increasing,” said Yusuke Ito, who invests in Treasuries in Tokyo at Mizuho Asset Management, which oversees $33.5 billion. “I have to be somewhat cautious.” Inflation isn’t fast enough yet for the company to drop its bullish stance on Treasuries, he said.

The benchmark U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 1.87 percent as of 7:35 a.m. New York time, according to Bloomberg Bond Trader data. The 2 percent note maturing in February 2025 rose 7/32, or $2.19 per $1,000 face value, to 101 6/32.

TIPS returned 2.9 percent this year through Monday, based on a Bank of America Corp. index, as investors sought protection in case inflation picks up. Conventional Treasuries gained 1.9 percent, according to the indexes.

Costs are currently stagnant in the world’s biggest economy. Consumer prices fell 0.1 percent in March from the year before, the Labor Department said April 17.

Faster Inflation

Quickening inflation will lead the Fed to raise its benchmark interest rate from near zero later this year, Bob Doll, the chief equity strategist at Nuveen Asset Management, wrote Monday on the company’s website. Nuveen manages $230.8 billion, according to the site.

“Higher inflation should put pressure on the Federal Reserve to change its current stance,” Doll wrote. “The Fed will begin increasing rates later this year, with September being the most likely liftoff point.”

That’s in line with the majority of economists surveyed by Bloomberg this month. In two surveys conducted in March, most said the first rate hike would come at the Fed’s June meeting.

Policy makers will increase borrowing costs for the first interest-rate increase since 2006 in about eight months, according to a Morgan Stanley index.

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