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Bond Rally Undercuts Inflation Fears

bond-rally-undercuts-inflation-fears

The monthslong decline in bond yields exemplifies investors’ belief that inflation likely isn’t the biggest problem facing the U.S. and global economy.

Monday’s sharp selloff in major U.S. stock indexes highlighted investors’ mounting concern that the biggest risk to markets right now is underwhelming growth, rather than the runaway price increases feared earlier in the year. At the same time, many investors think inflation readings may run hot for some period, then subside on their own or lead the Federal Reserve to raise interest rates and slow the recovery.

The yield on the benchmark 10-year U.S. Treasury note settled Tuesday at 1.208%, according to Tradeweb , up slightly from Monday but still down from 1.3% Friday and its 2021 high of 1.749% set in March.

Yields, which rise when bond prices fall, climbed sharply earlier in the year, lifted by bets that the U.S. economy would reach full employment with remarkable speed because of a vaccine-fueled recovery juiced by large-scale government spending.

Adding to the rise were signals from Fed officials that they would hold off raising interest rates until after inflation climbed above their 2% target for a sustained period. That bolstered investors’ confidence that the Fed would let the economy run hot, creating sustained inflation that the central bank could later control with well-timed rate increases.

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