Global Yield Surge Defies Skepticism on Inflation's Momentum
Strong Underlying Pressure Driving Inflation Globally Says Aviva's MunroRising inflation expectations in the world’s biggest economy are pushing up U.S. benchmark yields, putting pressure on rates to climb around the world and causing more than a few heads to swivel.
Federal Reserve officials may be attempting to tamp down concern of a U.S. price surge, but it hasn’t stopped yields from Tokyo to Frankfurt and New York ticking higher. In fact the yield of a $51 trillion Bloomberg Barclays index of global sovereigns and corporate debt is nearing a four-year high of 1.949 percent.
Yet even as April’s surge in raw materials drives inflation bets and those higher yields, the moves are relatively gentle. Treasury long-bond rates remain below February highs, and that suggests bond traders are so far taking events in stride.
“Actually there’s no overconcern yet in the market of inflation drifting dramatically higher -- if you look at long, medium or short Treasuries,” said Joe Lovrics, Citigroup Inc.’s Iberia Markets head in Madrid. “In fact there’s a growing group talking about the U.S. economy actually cooling now.”
Fed Speak
Although Fed official Loretta Mester mentioned inflation 18 times in a prepared speech Thursday, she concluded it probably won’t pick up sharply even as unemployment is likely to fall below 4 percent this year and remain there through 2019.
In Europe, where the European Central Bank’s unconventional stimulus has been crushing rates since 2015, ECB President Mario Draghi is seen taking longer to lay out its plan to exit that program as protectionism threatens the euro-area outlook, economists said in a Bloomberg survey.
While there has been some market excitement this year over the potential return of inflation and a possible bond bear market, a number of other factors having been fueling yield increases, according to Lovrics.
“We’ve had an unexpected rally in oil, tax stimulus, strong employment in the U.S. plus Fed remarks about rising inflation, and this kind of feeds on itself,” he said.
Traders driving up inflation-protected securities in bets on faster price growth took a breather mid-week, and the TIPs market dipped after a one-month, 1.9 percent rally.
Still, there remains upward momentum in cash bond yields and inflation markets. A projection for price growth in America over the next five years -- derived from inflation swaps -- rose to its highest level since August 2014 on Friday, and eyes have turned toward whether raw materials prices will make a difference.
“Our view is there’s strong underlying pressure driving inflation up pretty much globally,” Aviva Investors Chief Executive Officer Euan Munro said in an interview with Bloomberg TV.
— With assistance by Wes Goodman, Richard Jones, and Cecile Gutscher
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