Market-based expectations for the path of inflation in the next 10 years have moderated, with the difference between 10-year yields on Treasury Inflation-Protected Securities and U.S. debt not indexed for inflation narrowing to 2.30 percentage points, down from 2.59 percentage points on March 14. The difference, known as the break-even rate of inflation, equals the market’s forecast for the rate of increase in consumer prices.
Inflation rose 1% in March, the slowest since October 2009, according to the Fed’s preferred measure, the personal consumption expenditure index deflator. The index rose 1.3% in January and February.
“There are reasons why we’re at these yields,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.
Bond investors are gaining confidence that Fed Chairman Ben S. Bernanke will unwind the central bank’s unprecedented $3.3 trillion balance sheet without sparking a crash similar to 1994, when former Fed Chairman Alan Greenspan surprised the market by doubling benchmark lending rates in 12 months.
Though sovereign-debt levels have more than quadrupled to $23 trillion, yields for 10-year Treasuries are 5 percentage points lower than they were in 1994 and forward measures show the current 1.74% level rising only to 2.04% in a year. Policy makers’ forecasts of no rise in the target interest rate for overnight loans between banks until 2015 are damping yields in a market dominated by the Fed’s $1.84 trillion, or 15.4% of the $11.94 trillion in marketable U.S. debt.
The Federal Open Market Committee said in a statement following a two-day meeting in Washington on May 1 that it will maintain its bond buying at the current monthly pace of $85 billion and is prepared to raise or lower the level of purchases as economic conditions evolve. Policy makers also left in place their statement that they plan to hold the target rate around zero as long as unemployment remains above 6.5% and the outlook for inflation doesn’t exceed 2.5%.
Payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated, Labor Department figures showed May 3 in Washington. The median forecast of 90 economists surveyed by Bloomberg projected a 140,000 gain. The jobless rate fell to 7.5%, the lowest since December 2008.
Rates on Treasury one-month bills fell below zero for the first time since Dec. 31, reaching negative 0.005%.