Inflation Is Raging. Why Won’t Bond Yields Rise?

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Rising inflation didn’t make a dent in stocks or 10-year Treasuries.

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Spencer Platt / Getty Images

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It’s Market Mystery Du Jour. Inflation is rising, yet bond yield failedI—and no one is quite sure why.

Yes, the yield on the 10-year yield rose from 1.496% at the end of 2021 to 1.779% on January 10, its biggest six-day jump since March 2020. Because yields move in the opposite direction of prices, the value of the iShares 7-10 Year Treasury Bond Exchange-Traded Fund (ticker: IEF) fell 2%, certainly a painful drop for a safe haven asset. Everyone who was predicting that bond yields would be higher — the consensus for 2022 — was certainly celebrating.

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And then the yield stopped growing. Never mind, the consumer price index jumped 7% in December, something that emerged on Wednesday, when the 10-year plunge fell 0.021 percent to 1.724%. That means investors paid attention to the highest inflation rate since 1982 — since 1991 if you were judging by the base rate of 5.5% — but still bought 10-year Treasury notes. He also bought stock in the S&P 500, up 0.3% and the Dow Jones Industrial Average up 0.1%.

The reaction can only suggest that December inflation figures were already visible in the market, as said by Ian Lingen of BMO Capital Markets. They write, “The Fed’s threshold for inflation has long been met to justify rate normalization and so any upside surprises are a side-by-side event.” “One can clearly conclude, ‘Hey, this isn’t going to make the Fed grow any faster’ and to a large extent that’s true.”

But the 10-year yield just isn’t worth looking at. The two-year yield increased even though it was 0.008 percentage points to 0.905%, its highest since February 27, 2020, based on the 3 pm yield.

According to Lingen, the combination of two-year rising yields and declining 10-year yields suggests that markets believe the Federal Reserve can keep inflation from being a long-term problem. “We are interpreting the session as currently supporting the tightening limit with enough confidence that it will ultimately prove to be sufficient to hold inflationary expectations well,” they write.

Of course, betting on increasing 10-year yields has been everyone’s favorite pastime, and it still seems to be the consensus. Many still expect him to go higher. “With inflation still ravaging the economy and the Federal Reserve getting more bullish by the day, the increase in bond yields is probably just a warm-up act,” writes Jim Paulsen of the Luthald Group, which is one of the investors Keep your bond holdings in the higher side. yielding stocks.

A recent argument suggests that the Fed’s bond purchases have kept a lid on the 10-year yield, and that once it expires in March, if all goes according to plan, there will be a 10-year increase. will be free.

Maybe. But we’ll wait for another break before we get too excited.

Write to Ben Levison at [email protected]

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