Global markets from U.S. and European bonds to stocks and oil are sending a clear signal: inflation is finally coming back.
Thirty-year Treasury yields topped 2% for the first time in a year and the market-implied pace of U.S. consumer-price increases accelerated to the fastest since 2014, as rising expectations for an economic recovery fueled an oil rally. Across the Atlantic, a swap-market gauge of future inflation is close to its highest level since 2019, while U.K. government bonds continued their rout, with 10-year yields rising for a fifth day.
The S&P 500 index of U.S. equities looks poised to notch fresh highs, while the Stoxx Europe 600 Index built on its best weekly gain since mid-November. Brent crude futures rallied more than 1% on Monday, adding to last week’s impressive 6.2% advance.
The moves signal that investors are more bullish on inflation than they have been for years, betting on the global economy bouncing back as huge fiscal stimulus programs spur demand and the vaccine rollout gathers pace. That’s causing a dramatic repricing of bonds most sensitive to rising prices, raising longer-term borrowing costs.
“It’s hard to resist this reflation trade at the moment,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “With policy all one-way and U.S. refunding coming up this week, we may require some more concessions.”
Of course, for central bankers, there’s good inflation and bad inflation. A shortage of the chips that fuel everything from smartphones to cars and TVs could be an early indicator of problematic price rises on the horizon, but for now markets aren’t differentiating.
The U.S. 10-year breakeven rate—the yield difference between the benchmark Treasury note and its inflation-protected counterpart—touched 2.21% Monday, according to data compiled by Bloomberg. The gauge broke above 2% this year amid expectations of a successful rollout of coronavirus vaccinations and a U.S. stimulus package.
Other key reflation metrics were also on the move Monday, with the Treasury curve hitting the steepest levels since 2015 and oil prices climbing. The next U.S. inflation report is due on Wednesday, which may show consumer prices climbed last month at the fastest annual pace since March, according to a Bloomberg survey of economists.