As Rally Rolls, Keep an Eye on Inflation Expectations
For clues on inflation expectations in this carry-trade-crazed market, Tuesday’s auction of some $25 billion in 10-year treasury notes is something to pay attention to.
Last week’s Fed statement signaled all clear for the carry trade. And last weekend’s G-20 confab confirmed that the stimulus spigots at central banks will be open for the foreseeable future. But the Fed noted in its statement that it’s still going to be paying close attention to inflation expectations in the marketplace
An auction of some $40 billion in three year notes on Monday went well, and the equities market rally ratcheted up in response afterward, suggesting that some participants are keeping a close eye on the bond market. But the shorter end of the curve is anchored by the Fed’s near zero policy. Inflation worries are more likely to crop up in some of the longer-dated debt from Uncle Sam.
And there’s already some signs that worries about inflation are floating around out there. For one thing 10-year breakevens — that gap between the yield on 10-year Treasury Inflation Protected Securities (TIPS) and the yield on plain-vanilla 10-years — have been inching higher, a somewhat inflationary sign, although we’d need more evidence to confirm that inflation expectations are starting to break out.
“The tougher part for the Treasury will be selling (Tuesday’s) 10-year and Thursday’s 30-year auctions in light of the growing inflation expectations as measured by the TIPS, among other signs,” writes Peter Boockvar, of Miller Tabak.
If those auctions don’t go so well, and the yield on the longer end of the curve jumps, that might prompt more serious soul searching at the Fed. And uncertainty about how long the Fed will keep the spigots gushing liquidity could push some who’ve been betting on the weak dollar/rising risk trade to take a bit of money off the table.
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As Rally Rolls, Keep an Eye on Inflation Expectations
