Bond Traders' Inflation Bets Slammed Most This Year on Data Miss

  • Breakeven rates tumble after CPI, UMich price survey
  • Fed’s Evans says inflation ‘downside risks still predominate’

Fed's Evans Says 2% Inflation Goal 'Extremely Important'

Bond-market wagers on a pickup in U.S. inflation have been dealt a body blow.

The five-year breakeven rate, which measures the yield spread between Treasuries and Treasury Inflation Protected Securities, fell about 0.06 percentage point Friday, on pace for the biggest drop since June, while the 10-year gauge sank the most this year. The shift in expectations came as the core consumer price index rose less than forecast in April, building on figures for March that showed the first negative month-over-month reading since 2010.

Bolstering the market’s view that the inflation outlook may be waning, the University of Michigan’s survey of expected price changes over the next five to 10 years slipped to 2.3 percent, matching the lowest level since the school began collecting data in 1979. While the latest figures stopped short of quashing traders’ bets that the Federal Reserve will raise rates next month, they underscore the central bank’s challenge in achieving its inflation goal even amid a robust labor market.

The fact that both of the price-growth gauges missed “reduces the indicators the Fed can point to to show that its inflation mandate is sustainably achieved,” Aaron Kohli, a fixed-income strategist at BMO Capital Markets, wrote in a note. “It’s also one more sign, after two disappointing CPI prints, that inflation may be a bit more fragile than the Fed anticipated.”

The odds of a Fed hike next month are about 70 percent, down from close to 80 percent earlier in the week, based on the current effective fed funds rate and the forward overnight index swap rate. Policy makers have signaled they remain on a path of normalization with the unemployment rate at the lowest in nearly a decade. Data Thursday underscored the labor market’s momentum, showing jobless claims at a 28-year low.

Friday’s data rippled through the $14 trillion Treasuries market, where the benchmark 10-year yield tumbled about six basis points, on track for the biggest drop since April 18.

“At the moment I think the downside risks still predominate” around the outlook for inflation, Chicago Fed President Charles Evans said Friday at a conference.

    Before it's here, it's on the Bloomberg Terminal.