Bond traders’ inflation bets have new life

Bloomberg

Bond traders demonstrated this week that for all the doubts about the Trump trade, wagers on quicker inflation still have life. Look no further than the US 10-year breakeven rate. It climbed the most on a weekly basis this year, rising back toward 2 percent, suggesting the market is starting to hop back on the inflation bandwagon.
The shift is taking place just in time for the Federal Reserve’s May 3 policy announcement. While traders see little chance of a hike this week, an increase is seen as much more likely in June, and is fully priced in by September, futures show.
The focus this week may be on Fed officials’ assessment of the economic outlook after Trump administration fiscal initiatives that traders were betting on stalled.
“The reflation trade maybe got a little bit over-exuberant, but now it’s gotten to the opposite end of the spectrum,” Jonathan Beinner, chief investment officer of global fixed-
income strategies at Goldman Sachs Asset Management, said Friday on Bloomberg Television. “Markets are now being complacent as it relates to inflation.” Breakeven rates are staging a comeback after tumbling to 2017 lows in April, when the core consumer-price index declined for the first time in seven years. Helping trigger the recent leg up, the Fed’s preferred gauge of wage growth increased in the first quarter by the most since 2007, data showed Friday. On top of that, euro-area core inflation jumped to the highest since 2013.
For Goldman Sachs’s Beinner, the onus is on the Fed to push the market toward higher rates, given investors’ skepticism about the economy and inflation. That means sustaining bets on a June hike, potentially through a signal this week. For the June meeting, using the current effective fed funds rate and the forward OIS rate, the odds are about 63 percent, almost double what they were April 18, when the US 10-year yield touched its 2017 low of 2.16 percent.