Inflation Forecasts and Government Bond Yields Fall... "Concerns Over Low Growth Greater Than Inflation"

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Suhwan] As market expectations for long-term inflation continue to decline, U.S. Treasury yields have also been falling. While concerns about prolonged inflation have been dismissed, there is growing speculation that the possibility of low economic growth has increased.

On the 26th (local time), the Wall Street Journal (WSJ) reported, citing various polls, that signs of inflation are calming down.

According to a survey conducted by the University of Michigan targeting U.S. consumers, the expected inflation rate over the next year as of this month stands at 4.8%.

However, the inflation expectations for the next 5 to 10 years recorded 2.9%, down from 3% in the May survey.

Notably, the recently surveyed expectation of 2.9% is close to the average market expectation of 2.8% from polls conducted between 2000 and 2019.

This indicates that consumers view the possibility of prolonged inflation as low.

The WSJ also reported that bond market indicators dismiss concerns about prolonged inflation.

The U.S. 5-year breakeven rate (the difference between the yields of nominal Treasury bonds and Treasury Inflation-Protected Securities, reflecting market inflation expectations) has fallen by 0.19 percentage points since May.

Additionally, since early this year, the 5-year breakeven rate has consistently remained higher than the 10-year rate, suggesting that the market expects inflation to be a short-term phenomenon.

An expert from Oxford Economics stated, "The market expects inflation to occur in the short term," but added, "However, the dominant expectation is that as price increases subside, the Federal Reserve (Fed) will maintain its target inflation rate of 2%."

Industry inflation forecasts share a similar view.

According to a survey conducted by the Atlanta Fed of over 300 companies nationwide, most respondents expect an inflation rate of 2.8% over the next year, down from the 3% forecast in a June survey.

Although concerns about inflation are easing, the continued decline in U.S. Treasury yields has led to increased worries about low economic growth.

As of 9 a.m. Korean time on the 27th, the yield on the 10-year U.S. Treasury bond was 1.29%, significantly down from this year's high of 1.776% recorded in March.

Typically, when inflation occurs, Treasury yields rise as well. This reflects market expectations that central banks will raise benchmark interest rates to stabilize prices, which is mirrored in the bond market.

However, with the spread of the Delta variant raising concerns about renewed lockdowns worldwide, expectations that this will negatively impact the global economic recovery have pushed Treasury yields down.

Experts concluded that while concerns about prolonged inflation have been dismissed, the possibility of low economic growth has increased.

Oxford Economics stated, "At the beginning of the year, expectations for economic growth were high, but now that sentiment has reversed."

This content was produced with the assistance of AI translation services.