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US: Bond yield spreads and inflation expectations

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We have been following the spread movements for a while. The movement in short-term bonds is more prominent than the long side, and the converging interests have narrowed the spreads. The interest rate of the benchmark 10-year bond has reached the level of 1.56%, while we are at the level of 1.94% in the 30-years. In all maturities, there is a reaction to the October CPI data, which was quite high last week and increased persistent inflation concerns. Since consumer expectations point to higher inflation, demand that will be pushed forward with the expectation that prices will hike further in the short term will also have a marginal effect. In an economy with an employment gap, this level of demand also indicates that there may be an upside margin to fill. The inflation situation tends to change from the usual suspects to a multi-actor structure.

 

US 2-year – 10-year bond yield spread… Source: Bloomberg

 

For one thing, spending concepts have changed compared to the past. Therefore, we cannot evaluate the demand factor in the generally accepted norms at the moment. On the other hand; The effect of supply bottlenecks on the total amount of goods in the market is negative. Monetary policymakers see a difference between shortages caused by production and transportation cuts and shortages caused by excessive demand. We think that these two create an impulse-response mechanism that combines with each other. It is possible that the Fed will move to a new level in monetary policy tightening in order to reduce inflation, which is well above the target, to normal ranges within the stipulated time.

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US 5-year – 30-year bond yield spread… Source: Bloomberg

 

Reselling of Treasuries is at the forefront as price pressures may naturally force the Fed to raise interest rates sooner than expected. We observe that this situation brings the shorter-term interest rates closer to the long-term interest rates in terms of the coefficient of movement. The fact that inflation expectations are far from being fixed for the short term causes this different reaction. In terms of the medium and long term, the inflation transience thesis remains valid, but it has lost some strength.

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