For now, the U.S. government-bond market appears to be going along with the Federal Reserve’s view that inflation will remain largely under control, even after a few months of eye-popping readings. Beneath the relatively sanguine surface, though, is an undercurrent of worry.
The concern is that 10-year Treasury yields
currently hovering around 1.30%— along with breakeven rates implying expectations for annual price gains of about 2.3% over the coming decade — are understating the risks of a prolonged spell of higher U.S. inflation.
And if those risks come to fruition, pushing long-dated yields higher and steepening the yield curve just as in the first quarter, “that can very much lead to volatility across asset classes” as bonds sell off, credit spreads widen and stocks drop, said portfolio manager Scott Ruesterholz of Insight Investment, which manages more than $1…