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The stuck reflation trade in the bond market requires actual inflation

(Bloomberg) – The reflation trading that dominated the bond market in early 2021 has taken a breather, so investors are bracing themselves for important data in the coming week that has the potential to reinforce expectations that price pressures will increase Will increase over time The economy will recover. All eyes will be on Tuesday’s March release of the US consumer price index, which is expected to show a sharp jump. The number is likely skewed by the huge slump from last year’s numbers when the pandemic broke out. However, traders may be reluctant to oppose acceleration – as was the case to some extent with Friday’s stronger than forecasted producer price data – when there is a growing sense that it will mark the beginning of a trend. The stats come at a crucial time for bond bears betting on reflation. Market measurements of inflation expectations, fueled by ultra-lazy Federal Reserve policies and immense fiscal stimulus, have stalled near multi-year highs and have yet to be rigorously supported by actual data. The same applies to measuring instruments of the yield curve, which have withdrawn from the most recent highs. It’s not just about bond positions: regardless of the data, bets on a Fed tightening could fade from late 2022, potentially reducing demand for the surprisingly stable dollar. “We don’t have strong reflation trading momentum right now because people are waiting for more data,” said Daniel Tenengauzer, head of market strategy at Bank of New York Mellon Corp. Tenengauzer says that from then on, every inflation value counts because “the longer inflation stays at 2.5%,” an annual CPI value last seen before the pandemic broke out, “the more underwater you are from holding Fixed Income. ”Ten- Government bond yields rose on Friday while trading below the daily high after the PPI report saw a 4.2% increase from March 2020. While that was relative to a period when the pandemic brought down price pressures, it was the biggest annual gain since the start of 2011. The benchmark return has declined since it approached 1.8% last month, its highest level since January 2020. There are strong arguments on both sides of the inflation debate as the market is moving away from a phase of being driven by rising expectations of price pressures. to one where investors seek backup of the data. There is also a view that expectations for growth, not inflation, could dominate the government bond narrative later this year with higher real yields. Inflation Psychosis Chairman Jerome Powell, who is slated to appear on “60 Minute Sunday,” and will also speak Wednesday, has said any pickup in inflation is likely to be temporary. Hoisington Investment Management Co. said in its latest quarterly report that inflation fears are a “psychosis” that will subside. However, this does not mean that a jump in the consumer price index does not scare bond investors, at least for a moment. An increase of 2.5% compared to the previous year is forecast for March. This would be the highest value since January 2020 and above every point on the yield curve. This is a development that may undermine stocks as well. “The market has been pricing in a reflation theme since the second half of 2020, but strong, realized prints would almost fuel the fire,” said Shahid Ladha, head of Group of 10 Interest Rate Strategy for America at BNP Paribas SA. That, in turn, would put upside risk to intermediate-term yields as the Fed may have to tighten sooner than expected, he says. Investors are also tasked with absorbing a $ 120 billion worth of coupon auctions combined, including 30-year debt, over the next week as they ponder the inflation issue. While expectations of a higher CPI value may be cause for concern, the past month has shown that there is sufficient demand for government bonds, which should help to “lubricate future bond auctions,” said Tenengauzer. NFIB small business optimism; CPI; Average Earning April 14: MBA Mortgage Applications; Import / export prices; Fed’s Beige BookApril 15: Unemployment Claims; Retail sales; Empire manufacture; Philadelphia Fed Business Outlook; industrial production; Long consumer convenience; Corporate inventories; NAHB Housing Index; TIC FlowsApril 16: Building permits; Housing construction begins; University of Michigan SentimentFed Calendar: April 12: Eric Rosengren of the Boston Fed April 13: Patrick Harker of the Philadelphia Fed; Mary Daly of the San Francisco Fed; Thomas Barkin of the Richmond Fed; Raphael Bostic of the Atlanta Fed, Loretta Mester of the Cleveland Fed and Rosengren at an event on racism and the economy April 14: Robert Kaplan of the Dallas Fed; Powell speaks to the Economic Club of Washington; Beige book; John Williams of the New York Fed; Vice-Chair Richard Clarida discussed the new policy framework. Bostic April 15: Bostic; Daly; Lorie Logan, executive vice president of the New York Fed; Clarida; MesterApril 16: Kaplan in two appearancesAuction schedule: April 12: 13-, 26-week bills; 3-10yr NotesApril 13: 30Year NotesApril 15: 4-, 8Week Bills For more items like this, please visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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