Core government debt rose ahead of inflation data on Thursday as traders bet that signs that the US economy was overheating will be outweighed by assurances that the Federal Reserve will continue its supportive monetary policies.
The yield on the 10-year Treasury fell 0.05 percentage point to 1.49 percent, its second lowest in three months, according to Refinitiv data, while European government yields also declined.
Economists expect US consumer prices, excluding volatile food and energy prices, to rise 3.5 percent in May in the biggest year-on-year jump since 1993. Data on Wednesday already shown Chinese factory gate prices rose last month at the fastest pace since the financial crisis.
Rising inflation has raised concerns that higher interest rates are making fixed-interest securities such as government bonds less attractive. But the US central bank, which meets next week, confirmed that the bouts of price hikes are a transient effect of reopening industries after the coronavirus shutdown.
“Bonds are rising in anticipation of meetings where the Fed will say something like that again,” said Randeep Sommel, portfolio manager at M&G.
Some senior Federal Reserve officials, such as Vice President Randall Quarles, have called for Discussions about reducing the $120 billion in monthly central bank bond purchases that have supported markets during the pandemic. Another, Richard Clarida, has argue That the principal borrowing rate in the United States must remain at a record low level until the nation reaches its maximum employment level.
At the ECB’s monthly meeting on Thursday, ECB President Christine Lagarde is also expected to say the bloc still needs supportive monetary policy.
“While we expect President Lagarde to be cautiously optimistic… We also expect her to confirm that the recent increase in price pressures is likely to be temporary,” Daiwa economist Chris Chicluna said.
The yield on Italian 10-year bonds fell 0.03 percentage point to 0.83 percent on Wednesday, while the yield on German equivalent bonds fell 0.02 percentage point to minus 0.25 percent.
The move follows a sell-off in government bonds at the beginning of this year, spurred by expectations that US President Joe Biden’s multi-billion dollar stimulus package will stoke inflation.
“Selling positions are now pulling back from the bond markets,” said Estee Dweck, head of global market strategy at Natixis, referring to trades that sought to profit from lower stock prices. “They priced a lot of the growth into inflation very quickly, but we won’t know if the Fed is right or wrong until the end of the year,” she added.
The US 10-year break-even inflation rate, a measure of inflation expectations, fell 0.05 percentage point to 2.32 percent.
Stock markets fell on Wednesday. Wall Street’s S&P 500, which has been trading in a narrow range for weeks, and the technology-focused Nasdaq Composite Index fell at the end of the trading day, closing down 0.2 percent and 0.1 percent, respectively.
In Europe, travel-related stocks rose Reports The Biden administration has taken the first step toward easing the travel ban related to the coronavirus. The region-wide Stoxx Europe 600, which rose to an all-time high earlier this week, set a new record after climbing 0.1 per cent.
In currencies, the British pound fell 0.3 percent against the dollar at $ 1.4111, while the dollar rose 0.1 percent against a basket of its peers.
Brent crude, the global oil standard, fell 0.3 percent to $72 a barrel.