(Bloomberg) - Bond investors’ short-term U.S. inflation expectations jumped to a record as oil, natural gas and coal surged, with geopolitical worries adding to concern about already elevated price pressures.
Two-year U.S. breakeven rates on Treasury inflation-protected securities -- or the difference between those yields and the ones on typical Treasuries -- climbed as much as nine basis points to 3.76%, the highest since Bloomberg started compiling the data in 2004. The five-year gauge increased four basis points to 2.97%. The longer-term inflation expectations rose less, with the 10-year breakeven rate up two basis points to 2.46%. It’s well below the multi-year high of 2.78% set in November.
Brent oil closed in on $100 a barrel, after Russian President Vladimir Putin signed an order to send what he called “peacekeeping forces” to the two breakaway areas of Ukraine that he officially recognized on Monday. U.S. central bankers are confronting the hottest inflation in 40 years and will get more information on how their preferred gauge of price pressures performed in January later this week. Consumer confidence fell in February to the lowest since September as expectations for growth and financial prospects softened amid elevated inflation.
“It’s a stagflationary shock,” said James Athey, investment director at Aberdeen Asset Management. “The Russia situation is very much a contradictory influence on Treasuries.”
Higher oil prices means a more hawkish Federal Reserve, higher costs of living and lower growth, which should lead to a higher front-end yields and lower long-end yields, he said.
The breakeven curve has been inverted since last year, meaning that investors expect elevated inflation in the next few years will eventually fade. The five-year inflation gauge is more than 50 basis points above the 10-year rate, a record high.
Benchmark 10-year Treasury yields was little changed at 1.92%, compared with 2.06% set last week, which was the highest level since 2019. Two-year yields climbed as much as eight basis points to 1.54% earlier Tuesday. They pared gains as an auction of the notes attracted a record demand from end users.
Swap traders signaled the latest escalation has done little to alter the assumption that the Fed will raise interest rates at most of the seven meetings left in 2022. A 25-basis point hike next month is fully priced, and markets see more than a 20% chance for a 50-basis point move at the meeting. While New York Fed President John Williams leaned against a half-point increase, Fed Governor Michelle Bowman suggested that such a move could be on the table if incoming readings on inflation come in too high.
Fed Official Suggests Half-Point March Hike on Table If Data Hot
Volatility in the U.S. bond market has picked up in February as expectations for a withdrawal of central bank stimulus collide with haven bids amid escalating tensions in Ukraine. Treasuries had lost 3% this year, already exceeding the 2.3% decline in the full-year of 2021.
By Ye Xie
