A gauge of expectations for consumer prices over 10 years climbed to the highest in five months before Federal Reserve officials including Fed Bank of Philadelphia President Charles Plosser speak this week with markets indicating about a 60 percent chance interest rates will rise by July next year. European Central Bank President Mario Draghi signaled rates will probably remain low for at least 2 1/2 years.
“That Treasuries are still trading so cheap relative to what you can get in Europe continues to keep U.S. debt so well bid, especially when you factor in the lack of growth or inflation pressures,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The major question this week will be how well the auctions go will after last week’s Federal Open Market Committee meeting.”
The gap will widen to 137 basis points by the end of this year, according to the weighted average of analyst estimates compiled by Bloomberg.
Government data due on June 26 will show the Fed’s preferred measure of inflation rose to the highest since October 2012, analysts said.
The Fed’s 2 percent inflation goal is based on the personal consumption expenditures price index, which rose 1.8 percent last month from a year earlier, according to the median estimate of economists and strategists in a Bloomberg survey before the data on June 26. That’s after a 1.6 percent gain in April.
In the past 13 months, the gap between yields of two- and five-year Treasuries has doubled to 1.22 percentage points, according to data compiled by Bloomberg. At the same time, the difference between those of five- and 30-year securities has narrowed to the least since 2009 as the long bond rallied.
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