The rate of U.S. inflation implied by the bond market has accelerated to the fastest since 2014 as crude oil prices rose, coupled with rising expectations for an economic recovery.
The 10-year break even rate – the difference in returns between the 10-year treasury note and its inflation-protected counterpart – hit 2.21% on Monday, according to data compiled by Bloomberg.
The measure passed 2% this year amid rising expectations of a successful coronavirus vaccination and a US stimulus budget. Although, according to traders, inflation effects are rare in Asian hours, other reflection favorites also changed on Monday with the treasury curve reaching its highest level since 2015 and oil prices rising by more than 1%.
The Federal Reserve has shown an inflation measure that has historically followed the rise in the consumer price index by an average of about 40 basis points, indicating that the break even rate should reach about 2.40% to give confidence that officials will achieve their goal.
The break even climbed to a low of less than 0.5% in March last year, when the turmoil with pandemic and the prospect of a deflationary shock rocked markets. It has since advanced nine of the past ten months, first supported by a combination of aggressive monetary easing by the Fed.
The climb pushed real yields lower, raising the ten-year inflation-adjusted rate to a low of -1.12 in September. In recent weeks, it has held about -1.02% stability.
Momentum is meeting to encourage developments around a Covid-19 vaccine, and after Democrat Joe Biden won the US presidential election, it raised expectations for a clears fiscal stimulus package. The rise in oil prices to a one-year high amid rising global prices supply and an improved demand outlook boosted inflation expectations. Brent crude futures on the first month rose 6.2% last week.
– With help by Emily Barrett
(Updates with real yield levels and oil price movements in the last two paragraphs.)