Bond Market Inflation Outlook Jumps as Goldman Says More to Come

  • Gauge of global inflation expectations rises to 14-month high
  • Hatzius says Fed will respond by raising rates gradually

Economic Boosts, Risks of the Next U.S. President

Goldman Sachs Group Inc. says inflation pressures are starting to build -- and bonds are signaling traders agree.

Investors anticipate consumer prices worldwide will rise 1.3 percent annually, the highest level in 14 months, based on Bank of America Corp. data. The figure, derived by comparing yields on nominal government securities to those on inflation-linked debt, compares with Federal Reserve’s 2 percent target.

“All of the signals are suggesting that we are now pretty close to full employment, and we’re starting to exert some upward pressure on inflation,” Jan Hatzius, chief economist at Goldman Sachs in New York, said in a Bloomberg Television interview Tuesday. “I do think the Fed is going to respond to that. Gradually, but I think they will respond.”

There’s a 65 percent chance the Fed will raise interest rates in December, said Hatzius, whose firm is one of the 23 primary dealers that trade directly with the U.S. central bank. Federal funds futures contracts indicate the probability is 50 percent.

Benchmark 10-year note yields rose two basis points, or 0.02 percentage point, to 1.58 percent as of 6:11 a.m. New York time, according to Bloomberg Bond Trader data. The 1.5 percent security due in August 2026 fell 6/32, or $1.88 per $1,000 face amount, to 99 10/32.

Investors will focus on a string of speeches by Fed officials due Wednesday, including Chair Janet Yellen’s testimony before the House Financial Services Committee.

Inflation Data

An inflation gauge the Fed monitors advanced 0.9 percent in August from a year earlier, based on a Bloomberg survey of economists before the Commerce Department reports the figure Friday. It has been less than 2 percent for more than four years. Data due Wednesday will show orders for durable goods fell in August, according to a separate Bloomberg survey.

The Treasury Department is scheduled to sell $28 billion of seven-year notes and $13 billion of two-year floating-rate notes Wednesday.

For more on Treasuries and the Federal Reserve, click here.

Nikko Asset Management and Mizuho Asset Management both said inflation isn’t about to become a problem even as the global expectations gauge rises.

“It just means that the fear of deflation is lessening,” said Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset’s Australian unit, which oversees $14.6 billion. 

Inflation is in check in the biggest economies, and that’s reason to be bullish on bonds, said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset, which oversees about $49.7 billion. “I don’t think there’s any big driver to put upward pressure on prices” for goods and services, Ito said.

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