Treasury Yields Are Hardly Budging After Strong Inflation Data. Here’s Why.

 Treasury Yields Are Hardly Budging After Strong Inflation Data. Here’s Why.

Inflation data are showing signs of pickup, but so far Treasury investors are wagering that the Federal Reserve will tolerate further price rises before raising rates or cutting bond buying. Here, the appliance department at a Home Depot in Pembroke Pines, Fla., on a recent day.

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Inflation data Friday morning confirmed what investors expected—consumer prices are rising as the U.S. economy reopens. Bond yields barely responded, stirring a debate about how far yields may rise from here. 

The latest report on April inflation came in mostly in line with economist forecasts, with the personal consumption expenditures price index rising 0.6% in April from the month before, and 3.6% from last year. That matters because that metric is the Fed’s preferred gauge of inflation (rather than the consumer-price index), and far exceeds the central bank’s long-term target of 2%. 

The bond market did respond, albeit in a muted way, as pricing of 10-year and 30-year inflation rose by about a basis point (hundredth of a percentage point) after the report. Prices now reflect inflation around 2.45% over the next decade, and 2.33% over the next 30 years. 

But overall, bond investors didn’t appear to be too worried about inflation Friday. Treasury yields were nearly flat for the day. And they remain well below their peak near 1.75% from the end of the first quarter, when the market posted its worst quarterly performance since 1980

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There are a couple of potential explanations for that. First is that investors were expecting this rebound in consumer prices; they could believe Federal Reserve officials when they say the inflation will be “transitory,” and that any persistent inflation will be addressed with policy. Second is that investors were already pricing in strong April inflation after the CPI report, and the PCE data don’t provide much additional news. Trading may also simply be slow, as the bond market heads into a holiday weekend with an early suggested close at 2 p.m. 

Yet the recent calm in the bond market has Kit Juckes, macro strategist with

Société Générale,

arguing that the first quarter’s rise in yields may have been the extent of the market “tantrum” feared by bond investors. 

He argued that the “taper tantrum” has “already happened,” and that “a bet on further bond weakness is a bet on inflation proving to be stickier than the Fed can cope with.”

That would imply that if inflation continues to rise as expected—that is, if the rise is transitory—bond investors shouldn’t expect too much pain until the Fed starts tightening policy. 

Bank of America

strategists take the opposing view, however. Their bearish view isn’t a direct call on Fed policy or inflation, but on banks’ Treasury portfolios. The strategists argue that U.S. banks have been a “key domestic demand source” for Treasuries since the start of the pandemic, and that they may start lightening their holdings soon. 

The strategists argue that individuals and businesses will take out more loans in coming months, and that will reduce the space for Treasuries on banks’ balance sheets. The marginal reduction in demand from banks could weigh down Treasury prices and boost yields from here, the strategists say. 

Friday’s economic data may back up the logic behind Bank of America’s expectations for loan growth:  Personal income declined 13% in April, after a 21% stimulus-driven jump in March. As individuals start dipping into savings they built up during the pandemic, they may need to start taking out more loans. And economic growth and easing lending conditions may lead businesses to take out more loans as well. 

An “uptick in macro indicators and sustained improvement in COVID-19 should drive loan growth in [the second half of this year],” the bank wrote. “Increased bank loan holdings should reduce the necessity for continued Treasury accumulation and allow greater potential for a rate rise, especially if the Fed shifts to taper” talk this summer.

Write to Alexandra Scaggs at

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