Payden & Rygel: Core CPI components average year-over-year change
Treasury yields are on the rise again - should investors worry? Last month, when yields jumped, fears circulated of a breakdown in Treasury market liquidity, a flight from the U.S. dollar, and the failure of bonds to act as a traditional buffer to equity volatility. This week yields approached similar levels.
This time around, the drivers differ. First, equity markets and yields are surging in the light of the global trade truce - a "risk on" environment. Second, markets now expect only two rate cuts in 2025 compared to four last week, as better growth prospects and lingering inflation risks mean the Fed is in no rush to cut. Third, investors demand higher compensation for Treasuries as the budget deficit looks to remain near 7% of GDP.
While we agree the growth outlook is improved, we urge investors not to lose sight of the big picture on inflation. Data this week shows that core inflation has cooled notably from its peak, nearing the pre-Covid average in all three major categories. Some upside price risk still looms. but over the year, core inflation appears to be returning to normalcy.
