The United States is set to sell 10 years of inflation-linked debt next week, keeping the spotlight on the corner of the bond market, which rarely attracts so much attention in almost a quarter of a century since its debut.
Increased fears of the risk of rampant consumer price rises as the recovery resumes are prompting investors from all over the world to seek cover in government-protected securities, a market that has risen to $ 1.6 trillion. Traders talk about new entrants as retail buyers and global macro strategists – what veterans call a “tourist crowd.” Cash is also flowing into the largest traded on the stock exchange TIPS fund, part of the frantic demand that leads to inflation expectations over the next half decade to a 1
All this is added to rotating head for inflation traders. They say they were surprised by the surge in activity and the speed with which last year’s recession caused by a pandemic gave way in some minds to the level of anxiety in the 1970s regarding uncontrolled inflation. Chris McReynolds of Barclays Plc likens TIPS pricing volatility to “watching table tennis while sitting in the middle of the table.”
Leaving aside the questions of whether TIPS are overestimating inflationary pressures, traders see an opportunity at a time when forecasts for some key data, including consumer prices, have been going out of line with the actual readings. Gang Hu of hedge fund WinShore Capital Partners says he has seen many traders exit TIPS positions for most of this year as market inflation expectations have risen. He says the $ 13 billion auction on Thursday of inflation-linked debt will be seen as a key indicator of investor appetite and a possible opportunity for some to return.
“In fact, no one is doing very well where the short-term inflation footprints will land, and that’s throwing everyone out of their game,” said Hu, a managing partner at the New York-based fund. “There is a lot of noise in the latest prints and it’s not over yet. There is no way anyone can be very confident in what the next two or three prints will bring. “
This stimulates instability in a part of the bond market that has not typically seen such activity, with volumes fluctuating from week to week as the inflation readings above assess the Federal Reserve test. a frequently repeated message that the pressure is likely to be temporary.
Over the past week, the forecast for five-year inflation or at zero percentage, jumped to 2.82%, the highest since 2005, after a larger-than-expected jump in consumer prices for april. The ten-year nominal treasury yield reached its highest level in more than a month this week.
Bond signals have wide implications for different markets. Shares have plummeted since February after inflation, while traders pulled the time when they expect the Fed to raise interest rates, and a measure of consumer sentiment unexpectedly collapsed this week. Fear of inflation is also an engine flurry of corporate issuance.
Transient or not, signs of inflation are moving asset markets
“Obviously we’ve experienced a lot in this part of the market over the last 14 months, from ‘Wow, this pandemic is deflationary’ to ‘Well now, there’s inflation,'” McReynolds, head of inflation trading in the United States at Barclays in New York. “What is different in this episode is the crazy instability, in which investors move from hating TYPES to loving them, to hating again. We will probably be here for at least a few years, ”with instability heightened around consumer price announcements.
For most of its existence, the TIPS market has been largely bearish – traders there have been skeptical about the sustainability of any significant price gains that have emerged. Several times, when expectations rose, they always gave way.
One example: in lead-to the financial crisis of 2008, when the 5-year-old at zero speed shot to 2.73% against the background of the housing boom and rising oil prices. But the speed soon dropped and has largely remained below that level ever since.
The New York Fed announced on Thursday plans to reduce the amount of TIPS it will purchase next month. This tweak, along with what was previously said by the Ministry of Finance Planning to boost TIPS auctions in the coming quarters could help alleviate any short-term stock shortages.
For WinShore’s HuS, which trades in global inflation-protected securities, next week’s auction is a must. The last TIPS auction, on April 22 was the sale of 5-year securities, for which investor demand was strongest since 2019.
Hu says many retailers are probably “waiting to see if they can buy something cheap” and are currently trading zigzags – buying TIPS when at zero interest rates also narrow as sales rise as inflation expectations rise.
“We are stuck in negative feedback on inflation and we could easily achieve 4% -5% inflation in one year, much more than the market estimates,” he said. “We need to throw all our forecast models for the next three to six months out the window.”
What to watch
- Economic calendar:
- May 17: Production of the Empire; NAHB housing data; TIC flows
- May 18: Building permits; housing begins
- May 19: MBA mortgage applications; Protocols of the Federal Open Market Committee
- May 20: Philadelphia Fed business prospects; unemployment claims; Consumer comfort of Langer; leading index
- May 21: Markit US PMI; existing home sales
- Fed calendar:
- May 17: Vice President Richard Clarida; Clarida with Rafael Bostic of the Atlanta Fed
- May 18: Robert Kaplan of the Dallas Fed
- May 19: James Bullard of St. Louis Fed; Bostik interviewed at Businessweek / Bloomberg; FOMC minutes
- Trading schedule:
- May 17: 13-, 26-week bills
- May 18: 52-week bills; 42-day cash management accounts
- May 19: 20-year bonds
- May 20: 4-, 8-week bills; 10-year TIPS resumption