The implied inflation outlook via Treasury yield spreads in recent months has been pricing in a possibility that inflation has peaked. The forecast is debatable, but right or wrong the government bond market is doubling down on that bet.

The widely followed rate difference between the nominal and inflation-indexed 5-year Notes fell to 1.65% on Monday (Dec. 10), the lowest level in 15 months, based on daily data published by Treasury.gov (black line in chart below). The ongoing slide in the market’s inflation expectations raises questions about the Federal Reserve’s plans to hike interest rates again at the Dec. 18-19 FOMC meeting. Fed funds futures are currently estimating a 77% probability that the central bank will lift its target rate by 25 basis points to a 2.25%-to-2.50% range, according to CME data.

“The one thing I would say is there’s a high probability that this hike, assuming they hike, will be the last one for a long time,” hedge fund manager Paul Tudor Jones told CNBC on Monday.

The Treasury market is inclined to agree by pricing in lower inflation expectations for several months. A month ago, for example, The Capital Spectator noted that there were signs that Treasuries were anticipating that inflation’s recent rebound had peaked. A month later, bond traders have strengthened that projection.

The hard data on consumer prices aligns with the peak-inflation outlook, at least for now. Headline and core measures of the consumer price index (CPI) have recently eased from recent highs. Core CPI, for instance, dipped to a 2.2% annual pace in October, modestly below the previous 2.3% peak in July (based on seasonally adjusted data).

Using the average forecast via a set of combination forecasts from eight models suggests that core CPI’s annual change will tick down to a 2.1% year-over-year change in tomorrow’s November update and continue to soften in the months ahead.

By some accounts, however, the downgrade in the Treasury market’s inflation outlook is a temporary affair that’s less about the economic outlook vs. a risk-off focus triggered by various geopolitical risks, including the deteriorating prospects for the UK’s Brexit plans.

“The rally in Treasuries is presumably Brexit related,” opines Lou Brien, market strategist, at DRW Trading. “Part of the weakness in stocks, which has affected Treasuries, is technical in nature, and part of it is the incredible uncertainty in the UK, which has added to the already uncertain situation here in the US.”

Some of that uncertainty may lift, one way or the other, as it relates to the US inflation trend once the CPI update is published on Wednesday. Meantime, there’s no ambiguity these days in the directional bias for the Treasury market’s inflation outlook.