We got a big CPI print today, 5.0%. That’s above expectations. And, we saw a mild uptick in US Treasury bond yields on the back of the number. But I am wondering whether it really matters. Let me explain.
Yesterday, after posting on the death of the so-called bond vigilantes, I was talking to my friend J. And I told her that, back in February, I had been writing about my concerns regarding inflation expectations becoming unanchored. In our conversation, I referred to these comments:
this [rise in yields] is the market frontrunning the Fed based on expectations about real GDP growth or inflation or both. The market is essentially signalling concerns that nominal GDP is going higher and that yields need to move in that direction to either protect against inflation or because the Fed will act with a lag.
… I am more concerned about inflation this time than I was last time [in 2018]. I don’t think it is a secular issue, but it could be a cyclical one. With commodity prices rising and pent-up demand potentially buoying prices further still once enough people are vaccinated, we could see an even steeper sell off in bonds as inflation expectations rise. I remember being less concerned about that in 2018.