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Home>Inflation Hopes Spur Bond Rally -- Third-Quarter Report

Inflation Hopes Spur Bond Rally -- Third-Quarter Report

Inflation Hopes Spur Bond Rally -- Third-Quarter Report


 By Daniel Kruger 

Bond investors are starting to believe in inflation again.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.328% Friday and posted its first quarterly gain of the year, buoyed by an uptick in consumer prices that lent support to some policy makers' insistence that inflation will soon make a long-anticipated return to the central bank's 2% target.

Yields soared into the end of 2016 as investors bet that Trump administration policies would spark a surge of growth and inflation. The so-called reflation trade petered out, however, after inflation remained tepid and the administration's legislative agenda stalled, with the 10-year yield posting declines in each of this year's prior quarters.

Now, investors are beginning to revive some postelection wagers. A rebound in consumer prices and the prospect of tax cuts spurred bond selling in recent weeks, with the 10-year yield falling just twice in the past 15 sessions.

"It's a hopeful sign of better things to come for the economy," said Thomas Roth, managing director in the rates trading group at MUFG Securities Americas Inc. "The market has a little more hope, as it did at the beginning of the Trump administration."

The 10-year government yield has spent the past six months locked in a range near 2.25% as the economy has maintained a slow and steady pace and as consumer prices showed few signs of gathering momentum. In September, it hit its lowest close since the election, 2.061%, as investors sought the relative safety of government debt as tension escalated between the U.S. and North Korea and investors worried about damages from recent hurricanes.

The yield rebounded later in the month, however, after the Fed's decision to push ahead with an aggressive schedule for rate increases, penciling in one more this year and three for 2018. And while some analysts still harbor doubts about the prospects for the passage of tax overhaul, or other elements of the Trump administration's agenda, several said they're starting to anticipate more stimulative fiscal policy.

"There is a lot that policy makers and the markets are watching, and nobody knows how it will work out," said Gemma Wright-Casparius, who manages inflation-indexed Treasurys at Vanguard Group.

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