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Investors are picking sides in the bond market's tug of war over inflation

Investors are picking sides in a battle happening in the bond market that is seeing inflation expectations surge higher but nominal U.S. Treasury yields remain low and anchored in a tight range.

Why it matters: The disconnect between inflation expectations and the Treasury market could be driving much of the risk-taking behavior in assets like stocks, cryptocurrencies and commodities.


Break it down: Real yields — the yield on U.S. government bonds minus inflation — fell to an 11-week low this week and are headed back toward their all-time low close.

  • The lower real yields fall the more investors are inclined to move further out on the risk scale in a search for yield, so they can generate positive returns for their clients.

What's happening: While more money has plowed into stocks this year than over the last 12 years combined, investors also are buying record amounts of inflation-protected bonds (10 times the quarterly average of the past 20 years in Q1).

  • "Real yields are at all-time lows, so it’s really sort of a question of here and now the market pricing in all of these supply pressures," Subadra Rajappa, head of U.S. rates strategy at Société Générale, tells Axios.
  • "I’m just not sure the market has fully bought into this narrative from the Fed that rising inflation will actually be transitory."

The big picture: Inflation has become the biggest worry among market participants and a growing discussion topic among American families who are seeing prices rise across the board. But expectations for continued price increases are no longer being reflected in the all-important Treasury market.

  • Normally, investors sell bonds as inflation measures rise because it erodes the value of already-held bonds, but perhaps because of guidance from the Fed and chair Jerome Powell the opposite has happened.

By the numbers: The 5-year breakeven rate (a measure of investors' inflation expectations over 5 years) rose to 2.66%, its highest since a spike in July 2008 and about 30 points from the highest levels ever recorded in the data series.

  • 10-year breakeven rates are at their highest levels in more than 8 years and 30-year breakevens are at the highest since September 2014, according to Fed data.
  • But since the end of March, yields on the benchmark 10-year Treasury note have fallen by 18 basis points to 1.57%.

The bottom line: "There’s a tug of war within the market as to not just whether or not current price increases are transitory," says Quincy Krosby, chief market strategist for Prudential Financial. "But even if it is, how long does it last?"

Data: FRED; Chart: Dion Rabouin/Axios Visuals

Kathy Jones, chief fixed income strategist at Schwab, says she's not expecting double-digit inflation spikes as the U.S. saw in the 1970s, however, "I do think we could land at a higher level of inflation than we’ve had in the past," she tells Axios.

  • "Instead of limping along at 1.5% as we've done over the past decade, we could land at 2.5% or land at 3%."

Why it matters: That may not seem like much, but it would mean the current rate of price hikes continues and would represent the highest inflation the country has seen in at least 25 years.

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Biden administration suspends oil and gas leases in Arctic National Wildlife Refuge

The Interior Department suspended nearly a dozen oil and gas leases in the Arctic National Wildlife Refuge on Tuesday, the agency announced.

Why it matters: The move, which will require a new environmental analysis, will undo former President Trump's most significant environmental actions in his final days in office.

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GM boosts investment in electric, autonomous vehicles by $8 billion

General Motors plans to boost its cumulative investment in electric and autonomous vehicles to $35 billion from 2020-2025, a significant jump from a $27 billion target.

Driving the news: GM said this morning that the initiative will include building two new battery cell manufacturing plants in addition to the two already under construction in Tennessee and Ohio.

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AOC urges U.S. Anti-Doping Agency to end Sha'Carri Richardson's suspension

Reps. Alexandria Ocasio-Cortez (D-N.Y.) and Jamie Raskin (D-Md.) sent a letter to the U.S. Anti-Doping Agency encouraging the group to rethink sprinter Sha'Carri Richardson's one-month suspension for recreational marijuana use.

What they're saying: "We urge you to reconsider the policies that led to this and other suspensions for recreational marijuana use, and to reconsider Ms. Richardson’s suspension. Please strike a blow for civil liberties and civil rights by reversing this course you are on," Ocasio-Cortez and Raskin said.

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Venture capitalists invested a record $288 billion in the first half of 2021

Venture capitalists invested $288 billion in the first half of 2021, an all-time record, per Crunchbase.

By the numbers: Venture capitalists invested $140 billion into U.S.-based startups in the first half of 2021, anall-time record, per Ernst & Young. At that pace, the 2020 total should be surpassed in a matter of days.

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