U.S. government-bond prices bounced Tuesday after closely watched data on consumer prices signaled inflation remains muted, easing concerns among investors that rising prices could spark a fresh wave of volatility in financial markets.
The yield on the benchmark Treasury 10-year note, which serves as a reference rate for corporate debt, mortgages and consumer loans, shot up by roughly half a percentage point in about five weeks earlier this year as investors piled into bets that prices were primed to rise. Many anticipated that a $1.5 trillion tax-cut package and a budget agreement expected increase spending by roughly $300 billion would help lift prices and could cause the Federal Reserve to accelerate the pace of interest rate increases.
Tuesday’s data were the most-recent sign that those expectations, which helped spur swings in financial markets earlier this year, may have been premature.
The Labor Department said the consumer-price index, which measures what Americans pay for everything from washing machines to hotel stays, rose 2.2% in the 12 months to February, below the 2.3% estimated by economists surveyed by The Wall Street Journal. Core prices, which exclude energy and food, rose 1.8% for a third straight month, also below economists’ expectations, suggesting that inflationary pressures are still soft.
Bonds strengthened following the report, with the yield on the benchmark 10-year U.S. Treasury note dropping to 2.848% from 2.870% Monday and notching its lowest close since March 1. Yields fall as bond prices rise. Soft inflation is good for the value of bonds because it helps preserve the purchasing power of their fixed payments.
“We’ve been expecting inflation pressures for some time,” said Tom Stringfellow, chief investment officer at Frost Investment Advisors. “They’ve not lived up to expectations.”
The price data came after last week’s jobs report showed tepid wage gains, suggesting that while the economy is continuing to grow, tight labor markets aren’t generating signs of overheating.
Throughout the year, investors and analysts have been asking whether signs of a pickup in inflation could push the Fed to raise short-term interest rates four times this year, rather than the three it has penciled in. Minutes of the central bank’s January meeting, which suggested policy makers were becoming increasingly hawkish, helped send the yield on the 10-year note to a multiyear closing high of 2.943% toward the end of February.
But by Tuesday afternoon, federal-funds futures, used by traders to place bets on the course of interest rates, showed a 32% chance of the Fed raising short-term interest rates four times by year-end, according to CME Group, down from 35% Monday but up from 17% one month ago.
And the 10-year break-even rate, a gauge that measures the bond market’s expectations for inflation over the next decade, edged lower: The difference in yields between Treasurys and the equivalent maturity of Treasury inflation-protected securities fell to 2.1081% on Tuesday from 2.1177% Monday, according to Thomson Reuters.
In another sign of investor doubts about inflation picking up, bondlike stocks—which have been among the worst-performing sectors in the S&P 500 in 2018—rose Tuesday, bucking a broader market decline.
Shares of utilities, regarded as bond proxies because of their relatively hefty dividend payouts, edged up 0.2% Tuesday, while the S&P 500 fell 0.6%. Meanwhile, shares of financial companies, whose net-interest margins rise with interest rates, slid with bond yields, with the S&P 500 financial sector ending the day down 1.1%.
Despite the day’s data, some investors warn that numerous factors could still fuel inflation, including a weaker dollar, which affects prices for commodities including oil, and rising tensions over trade.
“What we’re most worried about right now is a trade war,” said
who manages inflation-protected bond portfolios for Loomis Sayles. Ms. Murphy said she is betting that inflation-protected Treasurys will outperform conventional government debt.
Investors and analysts say they are cognizant that inflation tends to accelerate early in the year, carrying yields higher with it, and that they need to remain on guard.
“That spike in inflation expectations is enough to do some damage to your portfolio,” Mr. Stringfellow said. “I don’t think you can be too aggressive” and take risks betting on longer-term bonds to hold their value in this environment.