Investors are taking further steps to hedge against hotter-than-expected US inflation in the coming years, marking the latest sign that concerns about price growth persist even as the bond selloff has eased.
A measure calculated by the Minneapolis Federal Reserve on the basis of options trading suggests a one in three chance that the US consumer inflation rate will climb above 3% over the next five years.
The rise in implied odds to the highest level in eight years shows how much traders seek to protect themselves against a sustained rise in inflation, even though many Wall Street economists are still only expecting a rise price escalation on the horizon as economic growth accelerates.
Data released last week shows investors bought $ 14.4 billion inflation-protected treasury bills in 2021, added additional evidence suggesting that fund managers are keen to protect their portfolios.
“It’s not that the market has become inflationary. It’s because the market is uncertain, ”said David Riley, chief investment strategist at BlueBay Asset Management.
Inflation fears have rocked the $ 21 billion U.S. government debt market, which sets the basis for global borrowing costs, as faster price growth eats away at fixed income flows provided by bonds . Long-term treasury bills suffered the most sale in four decades In the first quarter of this year, Joe Biden’s $ 1.9 billion stimulus package and improved vaccine rollout brightened the economic outlook.
However, the liquidation has waned in recent weeks, with the benchmark 10-year Treasury yield falling to around 1.55 percent, from a high of nearly 1.8 percent at the end of the month. March. Yields fall when prices rise.
Riley said data from the Minneapolis Fed showed traders are concerned about higher inflation but are unsure if it will materialize. “If the market really predicted that inflation would stay above the Fed target next year and beyond, I think [yields] would be significantly higher, ”he said.
Still, Arend Kapteyn, chief economist at UBS investment bank, said investors were in a ‘shoot first and ask questions later’ mentality when it comes to hedging against risk. ‘inflation.
Fed officials view inflation risks as “Overall balanced”, according to the minutes of its March meeting, with policymakers pointing to forces that could push price growth in either direction.
The central bank is targeting inflation of around 2%, although it has said it is willing to allow an overrun to make up for past deficits. Consumer prices rose at an annual rate of 2.6 percent in March, but economists said the rapid increase was fueled by a strong rebound in energy prices. The “core” measure, which excludes both food and energy, increased 1.6% more modestly.
The explosive growth of prices and a disorderly rise in bond yields top of list of investor concerns since March, before Covid-19, according to the survey of Bank of America fund managers.