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Inflation: Risk or reality for U.S. bond markets

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Increasing attention to whether inflation is a problem for the U.S. economy and financial markets isn’t resolved easily by looking at the most recent economic and financial market data. COVID-19-related economy and market adjustments continue to confound market observers and policy makers.

Inflation likely will surprise on the upside, Treasury Secretary Janet Yellen reminds us, and the New York Federal Reserve Bank reports that consumer inflation expectations are rising. How do we interpret June’s 5.4% 12-month consumer price index increase alongside a decline in the 10-year U.S. Treasury rate to 1.18% July 19 mid-morning?

Recent inflation data point to May and June spikes being transitory: base effects, pent-up consumer spending exacerbating supply-demand mismatch and broken supply chains.

What do the data say? The three largest components of the CPI basket: shelter…

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