‘Strange’ bond reaction to US inflation data puzzles investors

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A relentless rally in US Treasuries has accompanied the biggest burst of inflation in more than a decade, snapping typically reliable patterns and leaving investors scrambling for an explanation for what is going on in the world’s largest bond market.

Inflation is typically bad news for bond prices, eroding the value of the fixed payments the debt offers and making it more likely that central banks will respond with interest rate rises.

But recent months have turned that relationship on its head, at least for longer-dated debt. US Treasuries prices have run up big gains — with other bonds around the world following in their wake — pulling the 10-year yield to its lowest in more than three months this week just under 1.3 per cent, down from 1.75 per cent at the end of March.

“There’s a lot of head scratching going on,” said Mike Riddell, a portfolio manager at Allianz Global Investors. “On the face of it this move looks…

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