Treasuries may be taking a breather from the inflation debate but there are growing signs elsewhere
US 10-year breakevens are at 2.43% this week, its highest since 2013
Is inflation really coming? More importantly, is it here to stay when it does?
Yellen's remarks yesterday only served to intensify the debate surrounding the issue, and while 10-year Treasury yields are settling at around 1.60% for the time being, 10-year breakevens have actually kept pushing higher to 2.43% now*.
That is the highest level since April 2013 as the market continues to eye stronger inflation and price pressures to follow in the months ahead.
So, what exactly are market participants looking for?
The first of course is that of base effect adjustments, which should see inflation readings come in higher on a year-on-year basis due to the plunge in prices last year.
But another key factor to consider is the recent tightening in supply chains that have led to higher input and output costs across the globe. The strained supply is contributing to a bit of a feedback loop, which could keep price pressures higher for some time.
The fact that companies see supply chains being strained makes them just want to bring forward orders in case demand returns (amid the economic reopening, vaccine progress), which in turn strains supply conditions even further - and the cycle repeats itself.
The higher input and output costs will eventually feed into consumer inflation one way or another and there aren't any quick solutions for this.
The only way things will normalise is when trade conditions in general also experience some normalcy and get back to the way things were. But that requires more of a synchronised recovery/reopening across the globe more than anything else.
Until then, business and companies may continue to face such supply constraints and that could very well keep these elevated price pressures more persistent in the next year or so.
Can the Fed and other central bankers afford to wait that long for global conditions to normalise before tightening monetary policy? We can only wait and see I guess.