Fed Outlook Sees Treasury Break-Even Rate Rise to 3-Month High

A gauge of U.S. inflation expectations for the next 10 years climbed to the highest level in three months as investors weigh whether the Federal Reserve is underestimating the momentum in the economy.

Treasury five-year break-even rates were within one basis point of the highest since May 2013 after the Fed this week lowered its long-term estimate for its target interest rate. Ten-year notes headed for a third weekly gain before U.S. reports next week that economists say will show home sales rose and consumer confidence improved. The difference between Japan’s 10-year and 30-year yields was near the most since March 2013 after the Bank of Japan adjusted its bond-purchase program.

“More balanced positioning, the macro picture and maybe a market that shouldn’t be so relaxed on the inflation front argues for higher U.S. Treasury yields,” said Su-Lin Ong, a fixed-income strategist at Royal Bank of Canada in Sydney. “Maybe it’s because the Fed seems so relaxed on that front and you have to question whether that’s appropriate,” she said, referring to rising inflation expectations.


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