The Treasury market is signaling inflation expectations are rising, and one metric shows traders anticipate cost increases will reach Federal Reserve Chair Janet Yellenâ€™s 2 percent target.
The difference between yields on one-year U.S. government securities and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 2.11 percentage points. The figure was the highest in two years.
Inflation expectations for the next decade rose to 1.67 percent this week, the highest level since August. Crude oil has rebounded from a 12-year low, raising speculation the gain will make it easier for the Fed to increase interest rates. Policy markers held off at their meetings in January and March, citing slow inflation and declines in energy prices among the reasons. â€œOver the next three to six months, weâ€™re going to see a much stronger U.S. economy, and I think weâ€™re definitely going to be seeing some hikes coming up,â€ said John Gorman, the head of U.S. debt trading for Asia and the Pacific in Tokyo at Nomura Holdings Inc. Inflation measures are â€œdefinitely trending higher.â€
U.S. 10-year note yields were little changed at 1.93 percent. The price of the 1.625 percent note due in February 2026 was 97 1/4. The yield will be 2.3 percent to 2.4 percent by year-end, Gorman said.
Crude oil futures contracts have climbed almost 60 percent after bottoming in February at their lowest level since 2003.
The Fedâ€™s preferred inflation gauge climbed 1.3 percent in January from the year before, based on the most recent data. It has surged from 0.2 percent as recently as October.
Treasuries are unattractive, said Soniya Chen, a government bond analyst at Hontai Life Insurance Co. in Taipei, with $6.2 billion in assets. â€œThe yield is too low for us,â€ Chen said. Hontai prefers corporate bonds in the U.S., Asia and Europe, and has taken more risk over the past month, investing in global high-yield debt and emerging-market securities, she said.