Bond Traders Revive Inflation Bets With Fed’s Easy-Policy Vow

(Bloomberg) -- Bond traders ramped up bets on faster growth and inflation on Wednesday after Federal Reserve officials reiterated projections that they’ll hold rates near zero through 2023.

The signal of continued ultra-loose policy drove the Treasuries yield curve sharply steeper, with the gap from 5 to 30 years posting one of its biggest days of widening in recent months. Market measures of inflation expectations surged to multiyear highs, and the dollar fell along with shorter-maturity yields as traders edged away from bets the Fed would start tightening as soon as late next year.

The 10-year Treasury yield was higher on the day as Fed Chair Jerome Powell again indicated he wasn’t concerned over the recent surge in long-term yields -- with his focus still on whether financial conditions remained accommodative.

The Fed will allow an inflation overshoot, which “will keep the curve steepening as investors pencil in higher inflation risk premium, which should put upward pressure on the long-end of the curve,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.

The 10- and 30-year yields were up as much as 4 basis points in late afternoon trading. But in shorter maturities, yields sank, with the 5-year down several basis points as the Fed’s signals led money-market traders to slightly scale back wagers on tightening as soon as late 2022.

Seven of 18 Fed officials predicted higher rates by the end of 2023, compared with 5 of 17 at the December meeting, according to the latest Federal Open Market Committee quarterly economic projections. Still that left the median forecast unchanged at zero rates through 2023.

“We’re not going to act pre-emptively based on forecasts,” Powell told a virtual press conference following the decision, adding that it’ll take time to convince people that they’re willing to stick to that.

Powell Says No Need to React to Rising Treasury Yields

The Fed expects that a bump in inflation this year will be short-lived. Officials saw their preferred measure of price pressures slowing to 2% next year following a spike to 2.4% in 2021, according to the projections.

Powell “wants to let their words and their commitment to low short-term rates do all the work on policy accommodation,” said Thomas Graff, a portfolio manager at Brown Advisory.

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