Three months ago, bond traders were bracing for deflation in the U.S.

Now, they’re starting to worry about inflation -- and snapping up a record share of Treasuries that offer some protection.

So what’s changed? Part of the answer, of course, has to do with oil, which arrested what seemed like an unrelenting slide that pushed prices from more than $100 a barrel to less than $50 in a span of five months.

But perhaps just as important is the bond market’s changing perception of the Federal Reserve. Instead of worrying about how the Fed’s zeal to roll back its policy of holding interest rates near zero might choke off growth, bond traders are now confident the central bank will let the economy regain the momentum it lost with oil’s plunge before raising borrowing costs.

“We’ve been through the negative impact” of oil, said James Evans, a New York-based money manager at Brown Brothers Harriman & Co., which oversees about $15 billion. “And the Fed is still going to be very cautious about raising rates. The foundation is there for higher inflation.”

Evans said he’s been buying Treasury Inflation Protected Securities, or TIPS, due in five to 10 years.

He’s among a growing number who are embracing the inflation story. Trading in the securities as a percentage of total Treasuries volume reached an all-time high of about 2.75 percent this month, Fed data tracked by Barclays Plc shows.

Bond Shift

Investors have also purchased 72 percent of the TIPS auctioned by the Treasury Department this year, the greatest proportion since at least 2003.

Increased demand for inflation protection has coincided with an upturn in the bond market’s expectations for how much consumer prices will rise in coming years. Faster inflation erodes the buying power of fixed-rate payments of bonds.

Based on a metric known as the break-even rate, traders see inflation averaging 1.71 percent a year in the next half-decade. That’s a half-percentage point higher than at the end of 2014 and the biggest jump over a comparable period in four years.

“Headwinds on inflation are abating,” said Michael Pond, the head of inflation-linked research at Barclays in New York.

It’s a stark contrast to the state of affairs at the start of 2015, when the free fall in oil and other commodities raised the specter of a global deflationary spiral and pushed central banks from Europe to China to act and stimulate demand.

Too Soon

The U.S. economy was, and still is, widely seen as the world’s bright spot. But at the time, bond traders signaled the Fed was being too upbeat and overlooking the risks of falling energy prices on growth, as well as its ability to boost rates.

In January, when Treasury yields indicated the likelihood the U.S. would face a bout of deflation within a year, Fed officials lifted their assessment of the economy, played down low inflation and said cheaper energy would help boost consumer buying power in its policy statement.

A shift in the Fed’s stance occurred in March, when policy makers cut their forecast for how much they expected the key rate would rise this year. Fed Chair Janet Yellen also made the case for a cautious approach to rates in a March 27 speech.

By that time, U.S. consumer prices were in the midst of falling for a third month as a raft of disappointing reports on economic growth and consumer spending showed that lower gasoline prices did little to boost demand.

Investors such as DoubleLine Capital’s Jeffrey Gundlach warned the Fed against raising rates too soon as a slump in spending and hiring in the energy industry may cause a “ripple effect” in the broader economy.

‘Quite Cavalier’

“The market had been worried that the Fed was quite cavalier,” said Wan-Chong Kung, a Minneapolis-based money manager at Nuveen Asset Management, which oversees more than $100 billion. “That tone seems to have shifted.”

Based on Morgan Stanley’s analysis of futures trading, the Fed will start raising its benchmark rate in December. A month ago, the market was anticipating a September rate rise.

Holding borrowing costs low for longer doesn’t mean higher inflation is a sure thing. After all, inflation has fallen short of the Fed’s 2 percent goal for 34 straight months.

One reason is the dollar, which has appreciated 18 percent against 10 global currencies since the end of June as central banks outside the U.S., particularly the European Central Bank, stepped up stimulus measures. A stronger greenback helps keep inflation in check by holding down import prices and curbing demand for U.S. exports.

Enough Time

“Where we see some headwinds in overall inflation is still the strong dollar,” said Doug Trevallion, a fund manager at Babson Capital Management, which oversees $217 billion. That means “some more price weakness to come through.”

Giving the economy enough time to regain its footing may prevent the nightmare scenario Gundlach laid out, where higher rates derail the expansion and force the Fed to backtrack.

After expanding just 1.25 percent in the first quarter, growth will more than double to at least 3 percent in subsequent quarters, according to economists surveyed by Bloomberg.

And the longer the Fed keeps its easy-money policies in place, the greater the chances inflation will accelerate as the economy recovers from the oil shock, said James Barnes, a money manager at National Penn Investors Trust, which oversees $1.3 billion in fixed-income assets and owns TIPS.

Core consumer prices, which exclude food and energy, climbed 1.8 percent in the year through March, the most since October. The energy component in the reading has also increased in the past two months as oil rebounded from a six-year low.

“If market participants believe rates will stay lower for longer that puts more inflationary pressure” on the economy, Barnes said from Wyomissing, Pennsylvania.