The US CPI data released tonight will be the first inflation report to start reflecting the impact of the surge in oil prices. Economists predict that the monthly increase may reach a nearly four-year high. Bond traders have ramped up their hedging ahead of the CPI release.
As a fragile ceasefire agreement between the United States and Iran begins to take effect, investors in the $31 trillion U.S. Treasury market are hedging against potential further losses in government bonds ahead of a closely watched Consumer Price Index (CPI) report due on Friday.
On Thursday, traders increased their options-based hedges against rising yields on 5-year and 10-year U.S. Treasuries as they continued to adjust portfolios in response to the possibility of an inflation rebound triggered by last month’s surge in oil prices. Data from an investor survey released by JPMorgan on Tuesday showed that net long positions in the cash market were at their least bullish level in three weeks.
These trading dynamics come amid relief from stronger-than-expected non-farm payroll data released last week, which partially eased concerns about economic growth, shifting investor focus back to the potential consequences of high energy costs—with Brent crude prices having risen approximately 60% this year. Economists surveyed by Bloomberg expect the CPI data, due for release at 8:30 AM Eastern Time (Friday at 20:30 Beijing Time), to show the largest monthly increase since June 2022.
"The market either focuses on inflation or employment. Given that the latest employment data was fairly good, inflation has become everyone's primary concern," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
Amid fluctuating concerns over inflation versus growth, U.S. Treasury yields have experienced significant volatility in recent weeks. After retreating from recent highs, the 10-year Treasury yield held steady around 4.27% on Thursday, compared with 3.94% at the end of February.
In recent days, there has also been noticeable hedging activity against falling yields. For example, Wednesday saw substantial inflows into call options betting that the 10-year Treasury yield would drop to around 4.15% by April 17.
However, while traders are no longer pricing in a Federal Reserve rate hike in 2026, the probability of one 25-basis-point rate cut currently being priced in is only about 30%. This compares with expectations earlier this year for two 25-basis-point cuts.
"Ahead of Friday’s CPI data, we are adopting a defensive stance in the short term. This report will begin to reflect the conflict with Iran," said Gregory Faranello, head of U.S. rates at Amerivet Securities. "Given positive employment data and the likelihood of higher inflation readings in the coming months, we believe interest rates do not have room for sustained declines."
Some Fed officials also expressed similar concerns. The minutes of theFederal Open Market Committee(FOMC) meeting held from March 17 to 18, released on Wednesday, showed that an increasing number of Fed officials were concerned that the war in Iran could lead to rising inflation.
Some officials also emphasized that, given inflation has exceeded target levels for five consecutive years, “long-term inflation expectations may become more sensitive to rising energy prices.”
Editor/KOKO