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The US Treasury on its way to the best week of the year

U.S. Treasuries were on track for their best week in a year before New York City afternoon on Friday, as investors ignored the highest rate of inflation since 2008 to build up in the public debt.

The benchmark 10-year T-bill yield fell 0.09 percentage point to 1.47%, registering its largest weekly decline since June of last year.

The movement was propelled by lower inflation expectations. The 10-year breakeven inflation rate fell 0.08 percentage point to 2.36% this week.

This cooling in long-term inflation expectations came despite data on Thursday which showed the year-on-year increase in consumer prices in the United States jumped to 5% in June.

This suggests a growing willingness by investors to accept the Federal Reserve’s mantra that higher inflation will prove transient, settling in once comparisons to last year’s locked-in economy come to an end.

The 10-year Treasury yield fell 0.06 percentage point on Thursday, before declining 0.03 percentage point on Friday.

The world’s largest government bond market changed dramatically last month. Ten-year inflation expectations hit their highest level since 2013 in early May, and the 10-year Treasury fell 1.70% at that time. Many fund managers had bet that the Fed should react to the inflationary surge by soon reducing its monetary stimulus measures, by reducing purchases of treasury bills and government guaranteed mortgages which currently amount to 120 billion dollars. dollars per month.

“Last month people watched inflation pick up and thought central banks couldn’t just sit back and do nothing,” said Andrea Iannelli, chief investment officer at Fidelity International. “But investors are realizing that’s exactly what they’re going to do.”

Analysts say the recent rally was further fueled by a short squeeze as investors who placed bets against Treasuries earlier in the year were forced to throw in the towel when the market moved. against them.

Despite this week’s buying, many investors are still holding short positions, suggesting the squeeze may continue and yields may fall further, according to Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets.

A BMO client survey last week found that a record 71 percent of investors believed the next substantial move in Treasury yields would be higher. “We have responded to a variety of queries such as’ how long will the current distortions last? “Lyngen said.

Line graph of (%) showing lower equilibrium rates highlights cooling fears of inflation

Others expect this week’s Treasury rally to prove transitory, not inflation.

In this environment, the Fed will soon have to begin the process of easing markets for a slowdown in bond buying, perhaps as early as its meeting next week, according to Oliver Jones of Capital Economics.

The recent rally “might just be a pause to catch its breath after a historically rapid sell-off” in the first quarter of the year, he said. “We doubt it will last.”

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