Key market signals about inflation are lower before the second half of 2021.
When the 10-year Treasury’s benchmark rate rose sharply to 1.7% in March. Wall Street was also on high alert. It worries about the potential for the Federal Reserve to go overboard with supporting the economy during the pandemic. while at the risk of inflation. not seen since 1970
NOW THREE MONTHS LATER 10 YEARS RETURN TMUBMUSD10Y
It fell to 1.479% on Tuesday, down 11.3 basis points through June. But it also resists the 2% climb that many strategists set for the end of the year.
What does inflation forecast mean? “The 10-year Treasury is signaling that we won̵7;t be experiencing continued inflation above 2 percent,” Kathy Jones, chief bond strategist at the Schwab Center for Financial Research, told MarketWatch.
“I don’t think 10 years reflects the impact of QE as much as a review of the situation after the 2008 crisis,” Jones said, shortly after the Fed would begin. “Quantitative easing” again at the start of Pandemic with Treasurys Buyout Program and $120 Billion-Monthly Guaranteed Securities MBB
“The concern is that fiscal stimulus may run out too soon. And the economy has not returned to full growth and labor market participation,” Jones said. “That’s where we are.”
The higher costs are here.
That doesn’t mean the recent rise in the cost of living to its highest level in more than a decade isn’t important.
“I don’t think the market is saying that inflation is not going up,” said Eric Souza, senior portfolio manager at SVB Asset Management. There is no doubt about it. But will these increases persist?”
“I feel like the answer is ‘no’ when you think about where prices have been in the past,” he told MarketWatch, pointing to globalization and technological advancements that in the past have sustained huge price increases.
despite the financial stimulus measures But the Fed has been trying to keep inflation at its 2% target for the past 25 years.
The chart above shows the inflation-adjusted federal funds rate. There is a year-over-year change direction in the Core Consumer Price Index, which is a measure of inflation.
In addition to inflation, Souza outlined other factors. that have played a role in the fiscal market in recent months. This is especially true of pension funds and asset allocators who are becoming increasingly concerned about the SPX share price.
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“The 10-year Treasury is the S&P 500 of the bond market,” Souza said, “and now you have another group of buyers back,” he said, referring to large international buyers. including Japan which recently increased its Treasury debt holdings.
“With low global return on investment and from the perspective of liquidity It makes sense that those higher returns,” Souza said.
Meanwhile, Fed officials have yet to decide when the central bank will begin cutting its monthly bond-buying program. They have begun to discuss it.
in the last 15 months Fed asset purchases have helped maintain credit levels during the pandemic and low cost of borrowing for households and corporations. But when the economy and labor market recover The central bank has signaled that interest rates may rise from the current 0% to 0.25% range faster than initially anticipated.
read: Fed’s Rosengren says there may be conditions for lower bond buying at the end of the year. It will raise interest rates for the first time by the end of 2022.
The economy, on the other hand, was shaken by the trillions in stimulus from Washington. This includes special unemployment benefits and lump sum payments to U.S. households. had already begun to fade from the highest level.
George Cipolloni, portfolio manager at Penn Mutual Asset Management, said that as global forces affect the U.S. Treasury market, The 10-year low interest rate may also reflect the economic turmoil in the country.
“We used to be the dirtiest people in the laundry. And we are still that way.” Cipolloni said of the recession in fiscal markets’ position on low-yield, low-yield bonds.
“But I think in the United States We are going to run through a cyclical wave of higher than normal inflation,” he said, while also pointing to the softening price pressure. along with the supply chain disruption that occurred At the beginning of the epidemic
“You saw the LB00 lumber.
It went up and just dropped about 50 percent from its peak,” he said.
More relevant, Cipolloni pointed to a sharp rise in US debt levels during the pandemic. This could easily affect future US GDP growth. The second quarter, though, is expected to see an 8.2% annual rate.
And despite the spur of the plague that added liquidity to the market But banks since April have parked an ever-growing number of cars – most recently checking a record $841 billion – overnight in the Fed’s reverse buyback facility, which received five basis points instead of cash and Deposits for borrowing
“Unfortunately, I don’t know if there is a good solution in the situation we are in,” Cipolloni said.