The inflation market has experienced significant movements in March, with meaningful moves across the curve. The risk-off narrative that dominated the market in February led to depressed valuations for TIPS at the start of the conflict. However, the initial reaction of the market was a bid on traded inflation, particularly in the 1-5yr sector of the curve. This was driven by expectations of an inflation upside due to the conflict.

However, after last week’s auction, the inflation protection narrative has faded, and the asset class is now more closely correlated with financial conditions. If rates are held higher to combat potential reemerging inflation, and stocks signal contraction in growth expectations, then inflation should be bounded to the upside, particularly at longer tenors. This shift in narrative has put pressure on real yields across the curve, even as talks of negotiations between the US and Iran may stabilize things.

The volatility in the space has created opportunities worth considering for investors. One idea is to take advantage of the attractive value of real yields, particularly in the 30y RY which are flirting with 2.70% on a beta. Additionally, there are interesting trades to be made in the forward space, such as the BEI curve flattening.