Even with another central-bank rate increase expected next week, the so-called breakeven rate on five-year five-year forwards — a proxy for inflation expectations — has risen to about 2.3%, the highest since November, from a recent low on Jan. 18.
A similar gauge for 10-year inflation-linked bonds was up to 2.32% on Friday from 2.24% a week prior. It fell below 2.10%, the lowest level in nearly two years, on Jan. 18, the day before an auction of new securities that helped cheapen the market.
Month-end rebalancing of bond indexes to include the newly issued Treasury inflation-protected securities has the potential to drive demand for them, an additional factor for breakevens this week. Bloomberg Indices projected a larger-than-average 0.26-year increase in the duration of the US TIPS index.
Meanwhile, investors pulled a combined $490 million out of five major bond exchange-traded funds linked to inflation on Thursday, the largest such outflow since early December, according to data compiled by Bloomberg.
Economic indicators suggest price pressures are abating. University of Michigan survey respondents recently improved their US short- and long-term inflation expectations. Even the Fed’s preferred inflation measures eased in December to the slowest annual paces in over a year while consumer spending fell, according to data released on Friday.
While the economic data paves the way for policymakers to further scale back the pace of hikes, Fed officials have continued to warn against inflation that is still unacceptably higher than the central bank’s 2% target.
Read: Bond Traders Hedge Prospect That This May Be Fed’s Last Hike
The following is a series of indicators on how the market views US inflation.
Inflation Snapshot
Inflation News Bites
Key Upcoming US Releases
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Source: Economy - investing.com
