Inflation and Treasury Supply

August 6, 2018

Inflation and Treasury Supply Photo

The 10-year U.S. Treasury yield has been testing 3% for the last few weeks; however, this week, two key events may cause yields to break above this level. Inflation has been gradually rising since January, and this month’s readings will most likely show inflation rising at the fastest pace in several years. The expectation is for producer prices to have increased by 3.4% year-over-year, while consumer prices have increased by 2.9%. Given the recently imposed tariffs, I expect an upside surprise is possible in this week’s reports.

As deficits rise, the U.S. Treasury stands to issue a significant new supply of longer-dated bonds this week. The 10- and 30-year auction on Wednesday and Thursday will be closely watched for investor demand. The auctions come at a time when JPMorgan CEO Jamie Dimon is predicting that the 10-year Treasury yield could rise to 5%.

My expectation is for 10-year yields to rise to 3.5% in the next few months, but I believe the highest interest rates can climb without having a significant impact on economic growth is below 4% in the intermediate term.

Tags: Treasury yield | inflation | Tariffs | Bonds

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