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A closely watched bond market index points to rising price pressures in the United States in anticipation of President-elect Donald Trump’s policies that are expected to boost inflation.
The so-called break-even point for U.S. Treasuries, a proxy for investors’ inflation expectations, has risen steadily in recent weeks on economic data that showed tighter-than-expected price pressures and rising odds of Trump’s election.
The two-year break-even point (the difference between the yields of government bonds and inflation-linked bonds, which indicates the average inflation rate required to obtain the same return) rose 1 percentage point from September to 2.6%. .
Interest rates rose as markets began to price in the possibility of a Trump presidency more broadly, and soared this week after Trump was assured of victory.
Traders are betting that President Trump’s tariff and tax cut plans will create what Barclays analysts call a “reflation cocktail” in the world’s largest economy.
“We’re not just expecting a very short-term overshoot in inflation[from President Trump’s policies],” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. It is likely to be structural and long-term.”
Bond giant Pimco has also warned of the impact of “reflation” policies.
But other investors are questioning whether the market’s inflation expectations are overblown, given that President Trump’s campaign rhetoric on tariffs and taxes doesn’t match his actions while in office.
Federal Reserve Chairman Jerome Powell said Thursday that he is not yet concerned about changes in inflation expectations, which he said are broadly in line with his 2% inflation target.
Break-even rates have also risen in the UK as investors readjust to the expected inflationary effects of Labour’s first Budget. The two-year break-even point is structurally higher than the US as it reflects older inflation measures, but it has risen to 3.1% from 2.9% in mid-September, a slight increase in long-term inflation expectations. I am doing it.
Investors will now assess whether the impact of U.S. and U.K. government policies on inflation is sufficient to significantly change central banks’ easing course.
RBC’s Dowding said the Budget’s higher employment costs and other inflation-boosting factors could be an “impediment to the Bank of England cutting interest rates further” following this week’s quarter-point rate cut. Ta.
On Thursday, the central bank’s governor, Andrew Bailey, said the central bank would take a “gradual approach” to future interest rate cuts as it assesses how price pressures develop. Minutes of the Monetary Policy Committee emphasized “upside risks to products and commodity prices due to increased trade segmentation,” without mentioning Trump.
