The combination of Treasuries falling due to signals of U.S. inflation manifesting and stocks rising has led to decreasing demand for fixed-income securities as a sanctuary. With the global stock market no longer in free fall, benchmark 10-year yields have risen out of levels nearing record lows. Stocks rose Monday in both European and Asian markets. Following January’s surge in U.S. consumer prices, investors are once again looking to the Fed to monitor their decision on increasing interest rates. After falling to a seven year low earlier this month, Inflation anticipation implied from 10-year break-even rates continued to rise.
Bill Chepolis, head of fixed income for Europe, Middle East and Africa at Deutsche Asset Management, spoke on recent Treasuries activity and its implications on the market, “We have become much more cautious about government debt including Treasuries. We don’t feel that asset pricing reflects underlying economic trends, but has gotten ahead of themselves.” Chepolis also declared that he is “comfortable” with Deutsche Asset Management’s prediction that 10-year yields will rise to 2.20% by the end of the year. They also expect the Fed to raise interest rates two times before the year ends.
Excluding food and fuel, consumer prices in the U.S., according to government data, rose last month at the highest rate in over four years. After falling to the lowest level in nearly six years two weeks ago, the 10-year break-even rate rose for its second day. The 10-year break-even rate is a market indicator for anticipated inflation and is calculated from the difference in yields between nominal and index-linked bonds. Soniya Chen, a government bond trader at Hontai Life Insurance Co in Taipei, revealed her investment strategy pertaining to U.S. treasuries, “I’m thinking of shorting, the yield is too low. The American economy is still fine.”
Based on a survey of economists, a report set to be released Friday will display the Fed’s inflation gauge rose to the highest point in over a year. If the predicted increase of 1% is met, then half of the Fed’s target will be reached. The chances that the Fed will raise interest rates this year are roughly 44%, according to future prices, up from 11% just 11 days ago.