Tuesday saw headline US CPI inflation come in at 3.8% year-on-year for April. It was 2.4% before the war. That’s a 140bp uplift, and it’s not done. As it is, we’re set to hit 4% in May. Core hits 3% down the line. A persistence to the war and we risk adding to that. Getting to 5% inflation is quite probable if it goes on and on. From here, we likely have another week of waiting and watching the war given the China summit distraction, with the Strait remaining shut tight. All the while, Treasury yields are pressured higher.
The 10yr, now at 4.45%, has 4.5% in its sights. And once there, it will meet buyers, as that’s a level that flags a structural buy for many players. That said, it can just as easily sail on higher, especially as there is no easing in price pressures to help calm things down. The rise in yields post the CPI release was through higher inflation expectations and higher real yields, and there was also an edge higher in the swap spread. All quite tame so far. More re-pricing rather than outright selling.
But it risks getting less tame ahead. The Fed can’t cut here. And risk assets are pushing the boundaries of positivity (or have been). It’s a cocktail that Treasuries really should not feel comfortable with. Tuesday saw a 10yr auction test. There was a slight tail, which is never great, but no big issue. This, and the 30yr auction on Wednesday, are being helped by the concession built in the past couple of weeks (even if that concession is set to build further, in our view).