Bond Traders Are Way Ahead of the Fed’s Powell

The bond market these days is about as fun as watching paint dry. The benchmark 10-year Treasury note yield has moved less than 7.7 basis points in July, putting it on course for its smallest monthly range since 1973, according to Bloomberg News. Even so, some very important developments are happening beneath the surface that shouldn’t be ignored.

Federal Reserve Chairman Jerome Powell raised a few eyebrows on Wednesday when he told the House Financial Services Committee on his second day of semiannual testimony before Congress that policy makers are “slightly more worried about lower inflation.” That was a bit of a shocker given the Fed has already raised interest rates twice this year and has flagged at least one more before January. Perhaps Powell was just following the bond market’s lead. Despite overall yields being little changed, breakeven rates on Treasuries (which is what traders expect the rate of inflation to be over the life of the securities) have tumbled. For five-year securities, the rate has come all the way down to 2.02 percent on Wednesday from 2.17 percent in May. Much of that is likely due to weakness in the commodities market, especially the recent declines in oil and gasoline, but recent economic data have thrown doubt on the purchasing power of consumers. Specifically, the government said last week that real wages — or what consumers actually earn after taking inflation into account — failed to advance in June.