The U.S. Treasury has the best week of a year

U.S. Treasuries recorded their best week in a year as investors set aside the highest inflation rate since 2008 and rallied to government debt.

The benchmark performance of 10 years Treasury note it fell 0.103 percentage points to 1.45%, and recorded its biggest weekly decline since June last year.

The movement has been driven by the decline inflation expectations. The ten-year equilibrium inflation rate has fallen 0.08 percentage points to 2.34% this week.

This cooling in long-term inflation expectations has occurred despite data on Thursday showing year-on-year increases in the US consumer prices jumped at 5% in June.

This suggests a growing willingness among investors to accept the Federal Reserve’s mantra that higher inflation will be transitory, settling in once comparisons with last year’s closed economy are completed.

He 10-year Treasury return it sank 0.06 percentage points on Thursday, before recovering 0.02 percentage points on Friday.

There has been a strong change in the larger world government bonds market over the past month. Ten-year inflation expectations reached their highest level since 2013 in early May, and the 10-year Treasury yielded 1.70% at that time. Many fund managers bet that the Fed should respond to rising inflation by soon reducing its monetary stimulus, reducing Treasury purchases and government mortgages that currently reach $ 120 billion a month.

“Last month, people were looking at the recovery in inflation and thought that central banks could not solve or do anything,” said Andrea Iannelli, investment director at Fidelity International. “But investors are waking up to the fact that that’s actually exactly what they’re going to do.”

Analysts say the recent rally has been further fueled by small pressure, as investors who bet against the Treasury earlier this year were forced to throw in the towel when the market opposed them.

Despite this week’s buy, many investors still hold short positions, suggesting that compression could continue and yields could fall further, according to Ian Lyngen, head of U.S.-type strategy at BMO Capital Markets.

A customer survey conducted by BMO last week found a record 71% of investors who thought the next substantial measure of Treasury yields would be on the rise. “We have posed several questions along the lines of‘ how long will the current distortions last? Lyngen said.

Others expect this week’s Treasury rally to be transitory and inflation not.

In that environment, the Fed will soon have to begin the process of softening markets to slow bond buying, possibly as early as next week, according to Oliver Jones of Capital Economics.

The recent rally “may just be a pause to breathe after a historically fast sell-off” in the first quarter of the year, he said. “We doubt it will last.”

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