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The U.S. Treasury has the best week in a year

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The U.S. Treasury recorded its best week in a year, when investors dumped the highest inflation rate since 2008 and piled on government debt.

The benchmark yield over 10 years Treasure note it fell 0.103 percentage points to 1.45 percent, noting its biggest weekly drop since June last year.

The move was propelled by a decline inflation waits. The 10-year break-even inflation rate fell 0.08 percentage points to 2.34 percent this week.

This cooling of expectations for long-term inflation has occurred despite Thursday’s data showing annual growth in the United States. consumer prices have jumped to 5 percent in June.

This suggests a growing willingness among investors to accept the Federal Reserve’s mantra that higher inflation will prove transitory, settling once comparisons with last year’s blocked economy have made their course.

U 10-year Treasury yield it sank 0.06 percentage points Thursday, before recovering 0.02 percentage points on Friday.

There has been a drastic change in the largest in the world government bond market over the last month. Ten-year inflation expectations have hit their highest level since 2013 in early May, and the 10-year Treasury has given up 1.70 percent to that point. Many fund managers have speculated that the Fed should respond to inflation by quickly reducing its monetary stimulus, sharpening government-backed Treasury purchases and mortgages that currently reach $ 120 billion a month.

“Last month people watched the inflation recovery and thought that central banks can’t just stand and do nothing,” said Andrea Iannelli, investment director at Fidelity International. “But investors are waking up to the fact that that’s actually exactly what they’re going to do.”

Analysts say the recent rally was further fueled by a short run, as investors who placed bets against the Treasuries earlier this year were forced to throw in the towel when the market moved against them. to them.

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Despite this week’s takeover, many investors are still holding short positions, suggesting that squeezing could continue and yields could fall even further, according to Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets.

A customer survey by BMO last week found a record 71 percent of investors who thought the next substantial move in Treasury yields would be up. “We launched a variety of questions along the lines of‘ how long will the current distortions last? “, Said Lyngen.

The graph of (%) showing lower breakeven rates underscores fears of cooling inflation

Others expect that this week’s Treasury rally will prove transitory, and inflation will not.

In this environment, the Fed will soon begin the process of softening markets due to a slowdown in bond purchases, perhaps just its meeting next week, according to Oliver Jones of Capital Economics.

The recent rally “may just be a break to breathe after a historically rapid sell-off” in the first quarter of the year, he said. “We doubt it will last.”

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