The Treasury market is signaling inflation expectations are rising and one metric shows traders anticipate cost increases will reach Federal Reserve Chair Janet Yellen’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 Tuesday. 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.
“Over the next three to six months, we’re going to see a much stronger U.S. economy, and I think we’re definitely going to be seeing some hikes coming up,” said John Gorman, the head of U.S. debt trading for Asia and the Pacific in Tokyo at Nomura Holdings Inc. Inflation measures are “definitely trending higher.”
U.S. 10-year note yields were little changed at 1.95 percent as of 11:09 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 was 97 3/32.
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Crude oil futures contracts have climbed almost 60 percent after bottoming in February at their lowest level since 2003.
The Fed’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.
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