For the first time in two years, bond investors are betting that U.S. inflation will average close to 2% per year over the coming decade.
The market’s key measure of price expectations reached 1.981% on Tuesday after touching 1.992% Monday, the highest since December 2018, data compiled by Bloomberg show. The gauge, known as the breakeven rate, is gaining momentum as traders prepare for an economic recovery in 2021 now that a Brexit deal has been reached and as U.S. legislators have approved additional virus-relief aid. The roll-out of vaccinations against the coronavirus is also fueling the move higher.
It’s all happening against the backdrop of the Federal Reserve’s push to revive inflation, which has been too low for years. In August, policy makers unveiled an extensively previewed new approach, under which they will seek inflation that averages 2% over time by allowing price pressures to overshoot after periods of weakness. One key to that effort, officials have said, is the need to buoy expectations for inflation.
“The reflation trade is alive and well,” said Com Crocker, an investment strategist at New Century Advisors. Treasury Inflation-Protected Securities -- from which breakevens are derived -- are moving as investors “look ahead to the post-vaccine economic reopening, aided by the rally in commodities, the weaker dollar, Yellen heading to Treasury, and talk out of the incoming Biden administration of more stimulus and an infrastructure plan,” he said.
