(Bloomberg) — Global bond traders appear to be readying for a slow summer regardless of how this week’s key U.S. inflation data comes in.
The yield on 10-year U.S. Treasuries has fallen to as low as 1.50%, while those in Germany are at the most negative in a month. And a gauge of expected volatility in interest rates has dropped to its lowest since March, as markets show a willingness to look through short-term releases.
Interest Rate Volatility Falls as Summer Carry Trades Begin
Meanwhile, incoming data so far have done little to dissuade the Federal Reserve from its argument that price rises will be temporary, keeping the bond market supported. Last week’s much anticipated payroll numbers showed U.S. job growth picked up in May, but not enough to intensify worries about rising inflation.
That suggests even a surprise jump in the key U.S. report on consumer prices Thursday may do little to arrest the downward pressure on yields. Prices climbed 4.2% on an annualized basis in April, the most since 2008, and economists expect a figure of 4.7% in May.
“I don’t think even a slightly stronger number changes the narrative too much for the June Fed meeting, which is one where they will start to talk about talking about tapering,” wrote NatWest Markets strategist John Briggs in a note this week about the upcoming data.
Investors in Asia got a dry run of sorts Wednesday when China’s most widely watched inflation measure — the producer price index — surged to its highest since 2008, surpassing estimates. China’s bond yields responded with a shrug, sitting little changed on the day.
Other factors also may be weighing on yields, from buyers of haven assets to demand from pension funds with longer-term investment horizons. Italian bonds — among the region’s riskiest — led European peers higher Wednesday, suggesting investors are confident the European Central Bank will keep conditions accommodative when it sets policy Thursday.
“Rates markets appear remarkably robust,” said ING strategists including Antoine Bouvet. “It is clear that the market is pricing in the extension of the ECB’s accelerated asset purchase pace as a base case.”
One Reason Treasuries Don’t Seem That Worried About Inflation
For Ben Emons, managing director of global macro strategy at Medley Global Advisors LLC, the fact that speculators have already built up large short positions in U.S. Treasury futures suggests that bond yields could even fall further on a high inflation print, if traders decide to cover their bets.
“Short positioning in bonds therefore suggest the tailwinds for lower yields is picking up, entirely contrary to the direction of inflation,” he wrote in a note to clients. “A stronger CPI may lead to lower yields even when volatility rises.”
(Adds moves in European markets, details on ECB meeting in seventh paragraph.)
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