Here’s why the bond market shrugged off rising US inflation.

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It is a widely shared belief among investors that the biggest specter of the bond market is inflation. So when a measure of US annual inflation rose to its highest level since 2018, some market participants were surprised to see government bond yields moving lower, rather than higher.

“Normally, you would expect interest rates to go up a bit in the higher than expected CPI number, and they didn’t,” JR Gondeck, managing director of wealth management firm The Lerner Group, told MarketWatch. He says the lack of a bearish response could be a reflection of how markets were already anticipating inflation measures to rise in the spring of 2021. The yield on 10-year Treasury bonds TMUBMUSD10Y, 1.627% fell to 1.63% , after trading as high as 1.70% earlier in the day. Bond prices move inversely to yields. The drop in yields may also have boosted stocks on Tuesday, with the Nasdaq Composite COMP, + 1.13% gaining more than 1% and the S&P 500 SPX, + 0.45% rising 0.5%, in the last check. See: Wall Street faces a Fed that will do what it says. The consumer price index rose 0.6% last month, pushing the annual rate of inflation for the past year to 2.6% from 1.7% the previous month. But before the March data, inflation expectations were already quite high. The 10-year equilibrium rate, sometimes seen as a market-based measure of inflation prospects, stood at 2.33% on Monday, close to its highest levels since 2013. “Everyone knew prices were going going up and it will take a series of months of significant price increases to get a bigger reaction in the market, ”Edward Moya, senior market analyst for the Americas at OANDA, wrote in a note. “The increase in Treasury yields will remain limited until we discover if the next pressures on prices in the coming months are enormous. “In addition, the rise in annual inflation measures partly reflected the recovery from weak readings when the pandemic first hit the economy, according to Ryan Wang, US economist at HSBC. However, some argued that the bond market bullish on Tuesday’s consumer price figures may have been due more to the Johnson & Johnson JNJ news, -1.12% than inflation concerns. The Food and Drug Administration and the Centers for Disease Control and Prevention said they would stop use of Johnson’s COVID-19 vaccine as a precaution. “There is a bit of a ripple in the market with the announcement that J&J vaccines have stopped,” Kelsey Berro, portfolio manager at JPMorgan Asset Management, said in an interview. Ultimately, investors say that inflation data for the next several months may not matter as the Federal Reserve has largely ruled out what they expect to be a temporary overshoot of inflation, making it difficult to determine when the central bank It can change the way you think about when to raise interest rates. “The real question remains to what extent these numbers are transitory, as the Fed hopes, or something more durable and we won’t know until the end of this year,” John Leiper, chief investment officer at Tavistock Wealth, said in an email. comments. Read: Fed Doesn’t See Inflation Getting Out of Control, Says Harker