EC Junk Bonds Continue To Lead US Fixed Income Markets In 2021

The Treasury market is certainly pricing in higher inflation lately. The breakeven spread for nominal less inflation-indexed 5-year maturities (a proxy for inflation expectations) is currently around 2.5%. A year ago this spread was close to zero.

Some economists expect that hotter inflation will be a temporary affair. The Federal Reserve appears to be on board with this outlook as it continues to signal that no interest rate hikes are planned for the foreseeable future. Fed funds futures agree and are pricing in low odds of tighter policy for the rest of the year.

Jeffrey Gundlach of DoubleLine Capital sees a different future. “There’s plenty of indicators that suggest that inflation is going to go higher, and not just on a transitory basis, for a couple of months. So we’ll see how the Fed is trying to paint the picture, but they’re guessing.”

For an update on the “guessing,” tune in for today’s new episode of the Fed show (2:00 pm eastern), when the central bank releases a new policy statement, followed by Fed Chair Powell’s press conference.

As for what to expect today, Pimco’s Tony Crescenzi sees more of the same on tap. “We’re not expecting changes in the statement or much change in Chair Powell’s posture in the media. We’re not expecting the Fed to give any indication until summer as to what it might do with respect to its balance sheet.”

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Disclosures: None.

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