A gauge of U.S. inflation expectations for the next five years touched the highest level in more than a year after Yellen said two days ago that the Fed maintains its commitment to low interest rates and dismissed a faster-than-forecast rise in the U.S. consumer price index. Ten-year notes headed for a third weekly drop before U.S. reports next week that analysts say will show home sales rose and confidence in the economy improved.
“The market is voting with its feet and lifting rates because it doesn’t agree with Yellen’s conclusion on CPI,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
The five-year yield gained three basis points to 1.71 percent, pushing it to a fourth weekly gain.
Treasury five-year break-even rates, which measure the difference between yields on benchmark notes and similar-maturity Treasury Inflation Protected Securities, were 2.09 percentage points, the highest since May 2013. The 10-year break-even rate, was 2.26 percentage points, the highest since Jan. 15.
U.S. index-linked bonds outperformed their German and U.K. peers this year. They returned 5.2 percent, according to Bank of America Merrill Lynch indexes, versus 2.9 percent for Germany’s securities and 3.9 percent for British linkers.
“Inflation has been surprising on the upside in the U.S., in contrast to the downside in Europe,” said Anton Heese, fixed-income strategist at Morgan Stanley in London. “The market is starting to price in a recovery in U.S. inflation trends, as the economy recovers.”
Fed policy makers at their June 17-18 meeting cut monthly debt purchases by $10 billion to $35 billion, while leaving the target rate for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.
Yellen, at her June 18 press conference, said that the CPI has “been a bit on the high side” while adding that the recent “data that we’re seeing is noisy.” She emphasized the Federal Open Market Committee’s view that rates are likely to stay low for a “considerable time.”
The Fed’s preferred measure of inflation may have moved closer to the central bank’s 2 percent goal in May. The personal consumption expenditures price index rose 1.8 percent last month from a year earlier, according to the median estimate of 19 economists and strategists in a Bloomberg survey, after a 1.6 percent gain in April that was the most since November 2012.
Treasuries dropped on June 17 as the cost of living increased 0.4 percent, the biggest advance since February 2013, according to Labor Department data. It was the third monthly increase.
“We have had three upward surprises in U.S. CPI in the last three prints,” said Jorge Garayo, a fixed-income strategist at Societe Generale SA in London. “So it looks like finally we may be looking for inflation to move out of the recent low range.”
The U.S. government sold $7 billion of 30-year TIPS yesterday at a yield of 1.116 percent, versus the average forecast of 1.093 percent by seven of the Fed’s 22 primary dealers. The bid-to-coverratio, which gauges demand by comparing the amount bid with the amount offered, was 2.76, up from 2.34 at the previous sale in February.
The primary dealers held $39.8 billion of Treasury notes and bonds as of June 11, up from $6.2 billion on May 23 and the most since Nov. 29, according to central bank data.
(An earlier version of this story was corrected to show Treasury prices were set for a third weekly decline.)
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