by SignalFactory · February 9, 2021 | 10:45:04 UTC
Global markets from U.S. and European bonds to stocks and oil are sending a clear signal: inflation is finally coming back.
The market-implied pace of U.S. consumer-price increases briefly accelerated to the fastest since 2014, and 30-year Treasury yields temporarily topped 2% for the first time in a year as rising expectations for an economic recovery fueled an oil rally. Over in Europe, a swap-market gauge of future inflation is close to its highest level since 2019.
Treasury Long Bond Reaches 2% Milestone as Global Yields Awaken
The S&P 500 index of U.S. equities has notched fresh highs, while the Stoxx Europe 600 Index built on its best weekly gain since mid-November. Brent crude futures rallied more than 1% on Monday, adding to last week’s 6.2% advance. It is all coming ahead of a report Wednesday that is forecast to show U.S. consumer prices rising at a quickening pace.
The market moves signal that investors are more bullish on inflation than they have been for years, betting on the global economy bouncing back as huge fiscal stimulus programs spur demand and the vaccine rollout gathers pace. That is causing a dramatic repricing of bonds most sensitive to rising prices, rising longer-term borrowing costs.
Of course, for central bankers, there’s good inflation and bad inflation. A shortage of the chips that fuel everything from smartphones to cars and TVs could be an early indicator of problematic price rises on the horizon, but for now, markets aren’t differentiating.
The U.S. 10-year breakeven rate — the yield difference between the benchmark Treasury notes and its inflation-protected counterpart — touched 2.216% Monday before retreating, according to data compiled by Bloomberg. The gauge broke above 2% this year amid expectations of a successful rollout of coronavirus vaccinations and a U.S. stimulus package.
Other key reflation metrics were also on the move Monday, with the Treasury curve hitting the steepest levels since 2015 and oil prices climbing. U.S. inflation figures this week are projected to show consumer prices climbed last month at a 1.5% annual pace, the fastest since March, according to a Bloomberg survey of economists.
Price pressures within the commodity and goods sector may stem more from pandemic-related supply issues than economic confidence and demand, meaning this could peter out once equilibrium returns. Equally, it has the potential to generate the type of inflation that is not so easily corralled by tweaks to monetary policy should it show signs of breaking out.
The Federal Reserve targets an inflation measure that historically has trailed the rise in the consumer price index by about 40 basis points on average, suggesting that the breakeven rate needs to reach about 2.40% to express confidence that officials will reach their goal.
The bond-market inflation gauge has climbed from a low of less than 0.5% last March when pandemic-related turmoil rocked markets. It has since advanced for nine of the past 10 months, first supported by a combination of aggressive monetary easing from the Fed.
In recent months, the breakeven rate also drew support from Covid vaccine-related developments and Democrat Joe Biden’s victory in the U.S. election, which lifted expectations for a more-generous fiscal stimulus package. Oil prices rallying to a one-year high amid tightening global supply and an improving outlook for demand has given a further boost to inflation expectations.
In Europe, five-year, five-year inflation swaps — a gauge of expectations for price rises over the next decade — closed at 1.36%, not far below the highest closing level since May 2019. The reflation trade is also driving interest-rate swaps — with the 30-year rate jumping 10 basis points last week, the most since August.
A possible new government in Italy under former European Central Bank President Mario Draghi is helping to boost economic prospects there.
And in the U.K., investors have priced out the chance of the Bank of England cutting interest rates below 0%, with the nation’s vaccine program rocketing along.
All information on this website is of a general nature. The information is not adapted to conditions that are specific to your person or entity. The information provided can not be considered as personal, professional or legal advice or investment advice to the user.
Signal Factory is not represented as a registered investment consultant or brokerage dealer nor offers to buy or sell any of the financial instruments mentioned in the service offered.
While Signal Factory believes that the content provided is accurate, there are no explicit or implied warranties of accuracy. The information provided is believed to be reliable; Signal Factory does not guarantee the accuracy or completeness of the information provided. Third parties refer to Signal Factory to provide technology and information if a third party fails, and then there is a risk that the information may be delayed or not delivered at all.
All information and comments contained on this website, including but not limited to, opinions, analyzes, news, prices, research, and general, do not constitute investment advice or an invitation to buy or sell any type of instrument. Signal Factory assumes no responsibility for any loss or damage that may result, directly or indirectly, from the use or dependence on such information.
All information contained on this web site is a personal opinion or belief of the author. None of these data is a recommendation or financial advice in any sense, also within the meaning of any commercial act or law. Writers, publishers and affiliates of Signal Factory are not responsible for your trading in any way.
The information and opinions contained in the site are provided for information only and for educational reasons, should never be considered as direct or indirect advice to open a trading account and / or invest money in Forex trading with any Forex company . Signal Factory assumes no responsibility for any decisions taken by the user to create a merchant account with any of the brokers listed on this website. Anyone who decides to set up a merchant account or use the services, free of charge or paid, to any of the Forex companies mentioned on this website, bears full responsibility for their actions.
Any institution that offers a service and is listed on this website, including forex brokers, financial companies and other institutions, is present only for informational purposes. All ratings, ratings, banners, reviews, or other information found for any of the above-mentioned institutions are provided in a strictly objective manner and according to the best possible reflection of the materials on the official website of the company.
Forex trading is potentially high risk and may not be suitable for all investors. The high level of leverage can work both for and against merchants. Before each Forex investment, you should carefully consider your goals, past experience and risk level. The opinions and data contained on this site should not be considered as suggestions or advice for the sale or purchase of currency or other instruments. Past results do not show or guarantee future results.
Neither Signal Factory nor its affiliates ensure the accuracy of the content provided on this Site. You explicitly agree that viewing, visiting or using this website is at your own risk.