The market's concerns about inflation are very strong right now, and soaring Treasury yields clearly reflect that concern.
Weekly chart of 10-year Treasury yields, source: Investing.com
The U.S. Consumer Price Index (CPI) rose 8.5 percent year-on-year in March, though optimists noted that so-called "core" inflation was lower than expected, at just 0.3 percent, suggesting inflation may have peaked.
The truth may not be optimistic.
The PPI of the Producer Price Index released last week rose 11.2 percent. Wholesale prices interact with retail prices. The PPI hints that consumer prices will continue to rise.
At one point, the U.S. 10-year Treasury yield surged above 2.88 percent on Monday after a three-day holiday. Although there was a pullback in the late session, it still rose nearly 5 basis points on the day.
US 10/2-year Treasury yield curve, source: Investing.com
The rise in the 10-year treasury yield exceeded the two-year yield, widening the yield spread and unnerving technical analysts, who see resistance in the 30-40 basis point range, which they fear the yield curve will extend beyond that range.
With the two-year Treasury yield above 2.45% in late Trading on Monday, up just over 1 basis point on the day, the widening spread could indicate that investors have lost confidence in the Fed's ability to contain inflation over an extended period of time.
In a low-inflation environment, economists and consumers can ignore PPI and food and energy price fluctuations that are included in the overall inflation rate, which are excluded from the "core" inflation rate.
But soaring prices of oil, gas, food and other commodities are driving prices higher across the board and changing consumer expectations.
Bonds don't lie, and inflation hasn't peaked yet
The U.S. government, the Federal Reserve, Wall Street, and many financial media outlets may choose to lie for their own interests, but the bond market will not lie, even if some investors may be temporarily misled by optimistic analysis of the report.
Less than a month ago, Goldman Sachs predicted that yields on 10-year Treasuries could reach 2.7 percent by the end of the year. A week ago, yields had broken through that threshold.
Mohamed El-Erian, a former Chief Executive of the Pacific Investment Management Corporation (PIMCO) and now Chief Economist at Allianz, said inflation had not yet peaked and that the Fed might have to raise its inflation target from 2 percent to avoid damaging its credibility. However, the expert said raising that target to 3 percent would be "extremely controversial."
Europe yesterday ushered in the Easter holiday on Monday, but investors remain confused about the ECB's decision last week. Despite the eurozone's latest inflation rate of 7.5%, the ECB has decided to postpone the cancellation of monetary stimulus measures.
Weekly chart of the German 10-year yield curve, source: Investing.com
Investors bought EU government bonds, reducing yields. After the news, the yield on the German 10-year bond fell below 0.77%.
But Otmar Issing, the ECB's first chief economist and one of the euro's founders, slammed the decision and accused the central bank of "living in fantasy" and ignoring the spike in inflation.
Ising, a former Bundesbank official, made clear Germany's aversion to inflation. In an interview with the Financial Times, he said:
"Inflation is a sleeping dragon, and now that dragon has awakened."