Traders of global bond traders appear to be ready for a slow summer, regardless of how the main U.S. inflation data comes in this week as markets show a willingness to look through short-term releases.
Benchmark yields for German Treasuries and their equivalents are at a three-month low, while those in Australia are at the lowest since early May. A gauge of expected volatility in interest rates has dropped to its lowest since March.
Although investors have been scouring current economic releases for clues on the future path of inflation, data to date have done little to drive the Federal Reserve from its argument that price rises will be temporary and keep the bond market supported. The much anticipated payroll numbers for May showed that U.S. job growth had climbed in May, but not enough to lift fears about a rising inflation driving yields higher over it's more conservative relatives.
That suggests even a surprise jump in the U.S. Consumer Price Index report on Thursday may do little to stop the downward pressure on yields if investors continue to believe the Fed.
The prices have climbed in April on an annualized basis since 2008 by 4.2%, and economists expect a figure of 4.7% in May.
Despite my rate bearishness, I think the Fed can get away with 'transitory' even if May is strong, though only to a degree, wrote NatWest Markets strategist John Briggs in a note this week about the upcoming data. Even a slightly stronger number perhaps changes the narrative too much for the Fed meeting in June, which is one where they will start to talk about tapering.
Investors in China got a dry run of sorts Wednesday as China's most widely watched inflation measure - the producer price index - surged to its highest since 2008 and exceeded estimates. The yield of the bond derivatives in China responded with a shrug and have little changed on the day.
Other factors may also be weighing on yields, from buyers of ton assets to demand from pension funds with longer time-horizons.
One reason trust Treasuries do not seem that worried about inflation is that much worse.
For Ben Emons, managing director of global macro strategy at Medley Global Advisors LLC, the fact that speculators have already built up huge short positions in Treasury Futures implies that bond yields could fall further on a high inflation print if traders decide to cover their bets.
'Short positioning in bonds suggests that the tailwinds for lower yields are picking up, entirely contrary to inflation, he wrote in a note to clients. A stronger CPI can lead to lower yields, even when volatility rises.
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