Investors bet on prolonged inflationary pressure

Key indicators of investor inflation expectations have risen in recent weeks, adding fuel to concerns about rising consumer prices.

As of Wednesday, the gauge, known as the break-even point for 10 years, suggests that the consumer price index will rise by an average of 2.57% annually over the next 10 years, according to Federal Reserve Economic Data (FRED). .. This is up from the recent low of 2.28% in late September, the highest level since 2013.

The break-even point is determined by examining the difference in yield between nominal government bonds and Treasury inflation protection securities (TIPS). This rate is so called because TIPS holders can get the same returns as holders of nominal government bonds if the average annual CPI inflation matches the gap over the life of the bond.

The rise in break-even points is worrisome for some investors as it suggests that current inflationary pressures may last longer than previously expected. The Ministry of Labor said on October 13 that last month’s consumer price index was unadjusted and rose 5.4% year-on-year. The index tends to be slightly higher than the Federal Reserve’s recommended inflation gauge, but data still confirm that inflation is well above the central bank’s 2% annual target.

Investors and analysts are generally in the supply chain as companies increase their supply of goods to meet consumer demand, consumers return to more normal spending patterns, and buy fewer goods and more services. We expect inflation to cool in the coming months to further ease pressure on the market. However, many have revised their forecasts upwards in light of rising energy prices, rising rents, and increasing evidence of tight employment markets.

Some analysts warn that the break-even point may be heading in that direction, but still does not indicate serious concerns about long-term inflation.For example, the yield difference between nominal and inflation-protected securities suggests that CPI inflation will ease to 2.6% over five years. Then, after about 10 years, it drops to just below 2%. And even these numbers can overestimate baseline expectations, as breakevens can also rise on the basis of growing uncertainty about the inflation outlook.

Michael Pond, Head of Global Inflation-Indexed Research at Barclays PLC, said:..

Several factors have raised the break-even point this year, including the economic recovery with vaccines, massive government stimulus, and a consistent message from the central bank that the Fed is patient with its approach to tightening monetary policy.

Cheese is more volatile than other cheeses as the food market is raging these days. However, in supermarkets, prices are relatively stable. This is why sharp changes in wholesale cheese prices are slow to reach consumers.Illustration: Jacob Reynolds

Last year, Fed officials announced a new policy framework that said inflation was slightly above the 2% target and welcomed inflation to make up for the long term below that level.

Investor concerns about inflation have declined and flowed this year, but have clearly increased recently, flooding inflation-indexed bonds with cash. According to Refinitiv Lipper data, a net of about $ 2.1 billion in TIPS-focused mutual and exchange-traded funds in the two weeks leading up to October 13, the largest two-week inflow in more than two months. It was poured. This is compared to a net outflow of $ 1.7 billion from all taxable fixed income funds over the same period.

The Federal Reserve Board itself has recently expressed concern that supply chain turmoil increases the risk of more sustainable inflation. At the same time, Chairman Jerome Powell said the central bank did not expect the current rise in consumer prices to lead to a new regime in which inflation remains high year by year.

In particular, the break-even point has risen, despite investors moving ahead with forecasts when the Fed will start raising rates. Federal funds rate futures used by investors to bet on interest rate policies have recently shown the potential for a 51% rate hike by July 2022 and a 75% rate hike by September 2022. This is up from about 15% and 27% a month ago, respectively. ..

“The question now is when to pull forward. [in rate increases] Jim Vogel, interest rate strategist at FHN Financial, said:

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Raising interest rates usually slows economic growth by increasing borrowing costs, lowering consumer spending and curbing inflation.

Commodity price concerns could keep inflation expectations rising for a shorter period of time, according to some analysts, but the market has accelerated interest rate hikes to prevent investors from rising inflation expectations. It’s amazing that it wasn’t there.

Still, rising interest rate and inflation expectations are not incompatible, Barclays’ Pound said. Even if the Federal Reserve Board of Governors begins raising interest rates next year, it could still take years for interest rates to reach so-called neutral levels, and authorities believe it will not stimulate or slow the economy.

“The Fed says it will continue to implement exciting policies, even if inflation exceeds its target over the next three years,” he said.

Write to Sebastian Pellejero ( and Sam Goldfarb (

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Investors bet on prolonged inflationary pressure

Source link Investors bet on prolonged inflationary pressure

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