Analysis: US bond yields surge despite muted inflation as investors look beyond Fed


NEW YORK, Aug 23 (Reuters) – A recent spike in U.S. bond yields has come alongside muted expectations for inflation, a sign to some bond fund managers that economic resilience and high bond supply are now playing a larger role than second-guessing the Federal Reserve.

Benchmark 10-year nominal yields on Tuesday hit near 16-year peaks on concerns about U.S. Federal Reserve Chair Jerome Powell sending a hawkish message about keeping rates high at the annual Jackson Hole symposium on Friday.

Bond yields, which move inversely to prices, tend to rise in an inflationary environment because inflation erodes the value of a future bond payout.

But while higher moves in bond yields in the last several months were often driven by investors pricing in higher interest rates as the Fed sought to tame rising inflation, expectations on the pace of price rises have moved lower in recent weeks.

“The narrative has very much changed over the last few months,” said Calvin Norris, Portfolio Manager & US Rates Strategist at Aegon Asset Management.

Investors see evidence that a fresh set of drivers has taken hold, including the Bank of Japan letting yields go higher, which may reduce foreign investors’ appetite for Treasuries, and an increase in supply of U.S. government bonds, with investors demanding more for holding more debt.

While the timing and size of the central bank’s monetary tightening actions have preoccupied bond investors for well over a year, the market may have reached “an inflection point in terms of the primary driver of sentiment,” BMO Capital Markets analysts said in a note last week.


Sandstone Group