• Market expectations that the FOMC will raise the federal funds target rate at its March meeting soared this week. The implied probability of a rate hike at the FOMC’s upcoming meeting climbed from approximately 40% just one week ago to as high as 86% late this week as both investor sentiment and global inflation data continued to firm.18 On Tuesday alone, three members of the FOMC spoke about the possibility that it may raise rates as soon as its mid-March meeting.1
  • Amid the broad rally, yields on the 2-year and 10-year Treasury notes climbed approximately 17 basis points and 16 basis points, respectively, this week.2
  • While investors have re-embraced the so-called reflation trade, a notable distinction is emerging. Markets appear to be preparing for higher inflation in the U.S. over the short term but have become increasingly sanguine about inflation over a longer period of time.
  • As the chart highlights, the spread between 10-year and 2-year breakeven inflation rates has been declining since late November 2016 and, today, it is inverted.3 This means that markets see inflation picking up in the short term (2-year inflation expectations) but continue to expect a moderation in inflation over the long term (10 years).

1 CNBC.com, http://cnb.cx/2lCsMFC.
2 U.S. Department of the Treasury, http://bit.ly/2lZqrrP.
3 Bloomberg, based on the spread between the 10-year and 2-year breakeven inflation rates.


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