Bond Market Inflation Outlook Ebbs Before Fed's Favored Index

Treasury market inflation expectations slipped from this year’s high before a report economists said will show the Federal Reserve’s preferred gauge of price increases slowed last month.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.58 percentage points. It’s down from 1.67 set a week ago and compares with the central bank’s target of 2 percent.

“Inflation is still under control,” said Kim Youngsung, the head of overseas investment in Seoul at South Korea’s Government Employees Pension Service, which has $12.8 billion in assets. “There’s still a lot of demand” for Treasuries, he said.

U.S. 10-year note yields rose one basis point to 1.91 percent as of 10:47 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 was 97 13/32.

Trading is scheduled to stop at 3 p.m. in Japan Monday and stay shut in London for Easter Monday, according to the Securities Industry and Financial Markets Association. The market will open as usual in the U.S.

Ten-year yields will probably rise past 2 percent toward the end of 2016, and inflation will approach the Fed’s target as oil recovers from a two-year rout, according to Kim. U.S. securities will draw demand from investors seeking alternatives to negative interest rates in Europe and Japan, he said.

The TIPS gauge on inflation expectations had been rising through the second half of February and March, only to reverse course last week.

The Fed’s preferred inflation gauge rose 1 percent in February, versus 1.3 percent in January, according to a Bloomberg survey of economists before the report Monday. Gains in personal spending and income also slowed, based on the responses.

Figures on April 1 will show average hourly earnings, another inflation barometer, held at 2.2 percent in March from the year before, the surveys project. It’s the slowest pace since June.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net, Naoto Hosoda, Amit Prakash

By: Wes Goodman

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