Tags: bondholders | treasury | economy | inflation

Bad News for Bondholders as Global Outlook for Inflation Rises

Thursday, 16 Apr 2015 06:58 AM

The outlook for worldwide inflation is climbing and that may spell doom for the past month’s rally in Treasurys.

Investors anticipate consumer prices will rise at a rate of 1.45 percent annually, the highest level in almost two years, based on Bank of America Corp. data. The figure jumped from about 1 percent as recently as January. Prices are stagnant for now in the U.S. economy, the biggest in the world.

“People are slowly building in the fact that inflation is going to come back,” said John Gorman, the head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. It’ll be tough for benchmark U.S. Treasurys to rise and for yields to fall in that environment, he said.

The U.S. 10-year yield was little changed at 1.88 percent as of 6:27 a.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due in February 2025 was 101 2/32, holding a four-day advance.

Treasurys returned 1.4 percent in the past month through Wednesday and 5.8 percent during the previous 12 months, based on a Bloomberg index.

The good news for bond investors is that U.S. inflation is in check. Even if it climbs to 1.45 percent, that would still be less than the Federal Reserve’s target of 2 percent.

Consumer prices were unchanged in March from a year earlier, based on a Bloomberg survey of economists before the government reports the figure Friday. That would match February’s rate.

Oil’s Rally

Yet there are signs prices will pick up. Crude oil is beginning to climb back from a 2014 rout, while central banks in Europe and Japan are pressing ahead with record measures to spur growth.

There’s “modest upward pressure” on wages, according to a Fed report published Wednesday. Demand for Treasury Inflation Protected Securities is so strong that investors are willing to accept negative yields on some of the securities to buy them. Australia sold inflation-linked bonds at a yield below zero for the first time this week.

European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda both said this week their stimulus programs are effective. Germany’s inflation rate turned positive in March as the nation began its 1.1 trillion euro ($1.2 billion) bond-purchase plan.

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The outlook for worldwide inflation is climbing and that may spell doom for the past month's rally in Treasurys.Investors anticipate consumer prices will rise at a rate of 1.45 percent annually, the highest level in almost two years, based on Bank of America Corp. data. The...
bondholders, treasury, economy, inflation
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2015-58-16
Thursday, 16 Apr 2015 06:58 AM
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