Bond Market Does Not Blink at Inflation, What is Wrong?

For many years, inflation has been the “boy who cried wolf”, sometimes glimpsed, but never fully materializing. Bond markets have been sensitive to inflationary data, often selling off when CPI, PPI or PCE data comes in “hotter” than expected. Today’s Producer Price Index was expected to rise 0.1% in January, instead it jumped 0.5%. Did the bond market sell off and yields jump 5-10 bps? No. The bond market brushed off the news and instead focused on Fed comments warning of uncertainty due to coronavirus. Now that China/U.S. trade tensions have eased (and China is engaging in massive stimulus), global growth was expected to soar in 2020. It seems we have traded one uncertainty for a more nebulous and unknown danger. 10 year Treasury yield rose 1 bsp to 1.56%.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners