The recent spike in 10-year Treasury yields has sparked concerns about inflation, but Jim Reid of Deutsche Bank suggests the bond market is telling a different story. While the 10-year yield has risen by nearly 97 basis points this year, breakevens have accounted for only around 10 basis points of that move. Instead, almost all of the repricing has been in real yields, now at levels last seen in 2008. Breakevens have barely moved for three years, while term premium has stayed range-bound. This indicates a more significant repricing of policy rates and the neutral rate than an inflation or fiscal scare.

Strong Purchasing Managers’ Indexes (PMIs) were a trigger for the recent move in yields, with the Atlanta Fed GDP now at 5.08% for Q3. Positioning may be amplifying the move, but the underlying message is strong growth and a higher rate path. As Reid asks, where would the 10-year be if bonds actually started pricing an inflation problem?

The bond market’s message is consistent with the idea that policy rates are likely to rise further, rather than signaling an imminent inflation scare. While inflation expectations have increased in recent months, they remain subdued compared to historical levels. The bond market’s reaction to strong growth and rising inflation expectations suggests that investors are not yet pricing in a significant pick-up in inflation.