The Bond Market Is Bracing for a New Inflation Reading

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The 10-year U.S. Treasury Note’s yield has moved higher recently, likely signaling some concern that inflation could be harder to get under control than the market had anticipated.

It was yielding 3.74% on Friday, up from 3.4% at the beginning of February. Bond yields and prices move inversely.

Consider, however, that the yield is down from around 3.9% at the beginning of this year, and stood at 4.23% in late October.

Mike Cudzil, a senior bond portfolio manager at Pimco, cautions against “trying to translate 15 basis-point moves into a narrative.”

A basis point is one hundredth of a percentage point.

Cudzil thinks that inflation is moving in the right direction.

He points out that the 10-year annualized inflation break-even rate was recently at around 2.35%, based on Treasury inflation-protected securities, or TIPS.

What about the recent run-up in 10-year Treasury yields?

“The market is trying to assign maybe a slightly higher probability that there’s a chance that inflation remains for a little longer,” he says—or possibly “that inflation ends a little bit higher than markets thought.”

But Cudzil expects the core Consumer Price Index, or CPI, to end this year at below 3%. In December it increased at an annualized rate of 5.7%, well below the 9.1% increase in mid-2022.

Still, the Feb. 3 report showing that January nonfarm payrolls increased by an unexpected 517,000 caught many in the market by surprise.

It’s raised some concerns about for how long a higher level of inflation could persist—and about how long and how high the Federal Reserve will have to continue to raise rates.

Torsten Slok, chief economist at Apollo Global Management, observed in an email Friday that “Inflation continues to be a problem” and that “the evidence is accumulating that inflation will indeed remain more persistent.”

He cited 10 reasons, including his expectation that the housing market is bottoming, a strong labor market, and China’s reopening—notably its impact on commodity prices.

Marvin Loh, senior global macro strategist at State Street, senses that sentiment toward the Fed and inflation has shifted yet again.

Earlier this year, he says, there was a view by some in the market that the Fed wasn’t going to have to be as aggressive in raising rates. And if it did get more aggressive, it could subsequently “cut rates fairly aggressively because inflation was going to behave,” Loh says.

He expects the Fed to raise short-term rates at least twice more, most likely in increments of 25 basis points.

“There was at one point a view that we were going to get to March and be done” with rate hikes, Loh adds.

Not anymore.

The bond market, no doubt, will be playing very close attention to the January CPI when it’s released on Tuesday.

Write to Lawrence C. Strauss at [email protected]