Bond Front-Runners Don't Care About Inflation
Why are yields falling amid evidence of mounting price pressures? Investors know that, for the Fed, unemployment matters more.
The unemployment data are what counts, for the Fed at least.
Photographer: OLIVIER DOULIERY/AFP/Getty Images
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Super Thursday is with us. In the next few hours, we will find out how the European Central Bank intends to adjust monetary policy as Europe finally brings the pandemic under control, and we will also get to see whether the startling jump in April’s U.S. inflation numbers persisted or even accelerated in May. A lot hinges on this. And yet markets have behaved as though the outcome of these events were already known. There has been a sharp move away from bets on inflation. The fall in the benchmark 10-year yield since it peaked two months ago has now been equivalent to a rate cut by the Federal Reserve, and Wednesday saw it drop below 1.5% for the first time since March. With two-year yields staying almost unchanged, this means that the yield curve has flattened in the last three months.