Rising inflationary pressures are casting a shadow over the bond market, with the latest Personal Consumption Expenditures (PCE) report indicating a rise in the Fed's preferred inflation measure to 2.6% from 2.4%. This follows earlier reports of increasing Consumer Price Index (CPI) and Producer Price Index (PPI) figures, which have all surpassed the Federal Reserve's 2% target. The persistent inflation suggests that long-term bond yields may remain elevated, as fixed interest payments on bonds lose value in real terms. Torsten Slok, Chief Economist at Apollo Global, emphasized that the narrative of a slowing economy and declining inflation is misguided, further dampening hopes for a near-term rate cut by the Fed.
The iShares 20+ Year Treasury Bond ETF (TLT), which focuses on long-term U.S. Treasury bonds, is closely watched by investors as a barometer for interest rate expectations. With swap prices still reflecting a potential Fed rate cut in June, the market may soon need to adjust to the reality of sustained inflationary pressures. This adjustment could lead to an upward shift in bond yields, as investors recalibrate their expectations in light of persistent inflation and potential cost pressures from tariffs and housing affordability shocks.
As of 09:31 on January 31, TLT is trading at $88.44, slightly above its last close of $88.34. The ETF opened at $88.38, reaching an intraday high of $88.44, reflecting the market's cautious stance amid ongoing inflation concerns.