Stubborn Inflation Takes Steam Out of Bond RallyStubbornInflationTakesSteamOutofBondRally

After rallying to kick off 2023, negativity has returned to the bond market. Investors’ outlook for inflation has shifted of late, fueled most recently by a hotter-than-anticipated reading from the Federal Reserve’s preferred measure of inflation. The personal consumption expenditures (PCE) price index gained 0.6% in January from the previous month, the biggest increase since June. On a year-over-year basis, PCE inflation climbed back up to 5.4% from 5.3%. Inflation’s stubbornness, coupled with signs of US economic resilience, has raised expectations that rates will remain higher for longer, putting bonds under pressure. With a more hawkish tone emerging, developed-market yield curves have flattened further. In the US, the 2-year Treasury yield – considered the most sensitive to monetary policy – rose to its highest level in 16 years.

The expanding resurgence in economic data would indicate that the economy may narrowly avoid a recession in 2023, even as the Fed remains in play. Healthy spending trends have coincided with the ongoing recovery of service sectors such as leisure and hospitality, supporting a labor market that appears to be still going strong.