Some grumbling from the belly of the US Treasury curve.
US Treasuries had a rollercoaster day on Wednesday as soaring crude sent the 10-year yield lower by 6 basis points. UST gains then reversed within a couple of hours. Meanwhile five-year breakeven rates (the spread between inflation-linked and regular US debt notes) rose to the highest since July 2008 on inflation concerns.
And indeed there’s been some active movement in the TIPS market — with short-end inflation expectations (as implied by two-year TIPS) rallying as much as 35 basis points over the past week as they react to those commodity prices.
So — inflation expectations for sure. But maybe something else too.
Here’s Bank of America Merrill Lynch analysts on recent UST moves:
The market contributes the [10-year] move as dealers getting ready for the supply of US$29bn 7y, but a detailed scrutiny reveals that the move follows a stagflation concern which is clear from the 5y bond: almost the entire rally came from the real yield (RY), and the sell-off, from breakeven inflation (BEI). Beginning to end, the 5y RY (USGGT05Y) and BEI (USGGBE05) were respectively (-0.32%, 2.14%) and (-0.42%, 2.2%). The lower real yield is one reason that the USD traded weak.
The spread between five-year real yields and five-year breakeven inflation also looks to have completely reversed its 2008 (deflationary) relationship.
Salutations, stagflation expectations.
Unrest causing period of oil price shock – Mohamed El-Erian, via WSJ