Inflation Worries Lift Treasury Yields – March 1, 2021

Longer-term Treasury bond yields have been rising, with the yield on the 10-year Treasury hitting a one-year high last week (US Treasury Dept. data). It is a sign of confidence in the economy. But it also means bond investors are fretting over the possibility of higher inflation.

Currently, inflation, as measured by the Consumer Price Index (CPI), is low. As of January, the CPI is up just 1.5% versus one year ago, according to the U.S. Bureau of Labor Statistics.

I recognize that when analysts talk about low inflation, it can elicit all kinds of reactions. “Have you seen the price of health insurance, college tuition, popcorn at a movie theater, and the cost of cable TV?” Some items have risen. While the CPI doesn’t cover asset prices, such as homes (rent is used) and stock prices, the index is a broad-based measure of prices.

It is relevant for our purposes because the Federal Reserve, economists, and investors closely follow changes in the CPI.

Inflation has gradually slowed over the last 40 years. There are many reasons why the trend has been to the downside.

But is that about to change?

It’s a difficult question to answer with precision. There are many moving parts to the inflation-forecasting equation, but sentiment has begun to shift among bond investors.

Aided by December’s $900 billion relief package, the economy is off to a solid start this year.

Congress appears set to pass another stimulus bill that could approach $2 trillion. While new money will probably provide a boost to growth this year, there are concerns that too much money chasing too few goods could force prices to rise at a faster pace.

It’s one reason we have seen the yield on the 10-year Treasury bond more than double from its low last year. Confidence in the economic outlook is another reason.

The runaway inflation of the late 1970s is unlikely. No one, including the Fed, wants a repeat. But let’s not discount the possibility that inflation could creep higher in the months ahead.

Created 2021-03-01 15:10:14