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Basic government debt rose ahead of the release of inflation data on Thursday, as traders bet that signs suggesting the U.S. economy would overheat would be outpaced by assurances that the Federal Reserve would continue with its supportive monetary policies.
According to Refinitiv data, the yield on the 10-year Treasury bill fell 0.05 percentage points to 1.49%, the second lowest level in three months, while European government yields also fell step down.
Economists expect U.S. consumer prices, excluding volatile food and energy costs, to rise 3.5% in May, their biggest year-on-year jump since 1993. Data on Wednesday already showed that Chinese factory prices had risen last month at the fastest pace since the financial crisis.
Rising inflation has sparked fears of higher interest rates that make fixed interest rates like government bonds less attractive. But the U.S. central bank, which meets next week, has maintained that episodes of higher prices are a transient effect of reopening industries after coronavirus shutdowns.
“Bonds are accelerating in anticipation of meetings where the Fed will say something like that again,” said Randeep Somel, M&G’s portfolio manager.
Some senior Fed officials, such as Vice President Randal Quarles, have it called by discussions on the central bank’s $ 120 billion monthly reduction in bond purchases that have supported markets through the pandemic. Another, Richard Clarida, has one he argued that the main type of U.S. debt must be kept to a record low until the nation reaches maximum employment.
At its monthly meeting of the European Central Bank on Thursday, its president, Christine Lagarde, is also expected to say the bloc still needs a supportive monetary policy.
“While we expect President Lagarde to be cautiously optimistic… We also expect him to emphasize that the recent rise in price pressure is likely to be transitory,” said Daiwa economist Chris Scicluna.
Italy’s ten-year bond yield fell 0.03 percentage points to 0.83% on Wednesday, while the German equivalent Bund’s yield fell 0.02 percentage points to at least 0.25%.
The move comes after the sale of government bonds earlier this year, driven by expectations that US President Joe Biden’s multimillion-dollar stimulus package would trigger inflation.
“Shorts are retiring from bond markets,” said Esty Dwek, head of Natixis ’global market strategy, referring to operations that were trying to benefit from falling stock prices. “They set very fast inflation growth very quickly,” he added, “but we won’t know if the Fed is right or wrong until near the end of the year.”
The U.S. ten-year rate of return on inflation, a measure of inflation expectations, fell 0.05 percentage points to 2.32%.
Stock markets fell on Wednesday. Both the Wall Street S&P 500 index, which has been trading in a narrow range for weeks, and the technology-focused Nasdaq Composite fell at the end of the trading day, closing 0.2% and a 0.1% lower, respectively.
In Europe, travel-related actions increased reports that the Biden administration had taken the first step to relax coronavirus-related travel bans. The region-wide Stoxx Europe 600, which hit all-time highs earlier this week, set a new record after climbing 0.1 percent.
In foreign currency, the pound sterling fell 0.3% against the dollar, to $ 1,4111, while the greenback rose 0.1% against a basket of peers.
Brent crude, the international benchmark for oil, fell 0.3% to $ 72 a barrel.
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