Bonds are piling up on both sides of the Atlantic ahead of U.S. inflation data

Core government debt gathered ahead of the release of inflation data on Thursday as traders bet that signs suggesting the U.S. economy is overheating will outweigh guarantees that the Federal Reserve will continue with supportive monetary policy.

Yields on the ten-year treasury fell 0.05 percentage points to 1.49 percent, the second-lowest level in three months, according to Refinitive, while European government yields also slipped.

Economists expect U.S. consumer prices, excluding volatile food and energy costs, to rise 3.5 percent in May, their biggest year-on-year jump since 1993. Data on Wednesday already shown that Chinese factory prices climbed at the fastest pace since the financial crisis last month.

Rising inflation has fueled fears of higher interest rates that make fixed-rate securities, such as government bonds, less attractive. But the U.S. central bank, which is meeting next week, has argued that the surges in higher prices are a temporary effect of industries reopening after the coronavirus shut down.

“Bonds are gathering in anticipation of meetings where the Fed will say something similar again,” said Randeep Somel, portfolio manager at M&G.

Some senior Fed officials, such as Deputy Chairman Randall Quarles, are called on discussions on reducing the central bank’s monthly bond purchases of $ 120 billion that supported the market through a pandemic. The other, Richard Clarida, he argued that the main US lending rate should remain at record lows until the nation reaches maximum employment.

At the European Central Bank’s monthly meeting on Thursday, its president, Christine Lagarde, is also expected to say the bloc still needs supportive monetary policy.

“Although we expect President Lagarde to be cautiously optimistic. . . we also expect him to point out that the recent rise in price pressure is likely to be temporary, ”said Daiwe economist Chris Scicluna.

The yield on the 10-year Italian bond fell 0.03 percentage points to 0.83 percent on Wednesday, while the yield on the equivalent German bond fell 0.02 percentage points to minus 0.25 percent.

The move followed the sale of government bonds earlier this year, driven by expectations that a package of US President Joe Biden’s stimulus packages would boost inflation.

“Shorts are now being withdrawn from the bond market,” said Esty Dwek, head of global market strategy at Natixis, referring to stores that wanted to profit from falling stock prices. “They set a big rise in inflation very quickly,” she added, “but we won’t know if the Fed is right or not, just before the end of the year.”

The ten-year break-even rate in the U.S., a measure of inflation expectations, fell 0.05 percentage points to 2.32 percent.

Stock markets were subdued on Wednesday. The Wall Street S&P 500 index, which has been trading in a narrow range for weeks, and the technology-focused Nasdaq Composite went lower at the end of the trading day, closing 0.2 and 0.1 percent lower, respectively.

Travel-related stocks have increased in Europe reports that the Biden administration has taken the first step toward easing travel bans related to the coronavirus. The broad Stoxx Europe 600 region, which climbed to its highest level earlier this week, set a new record after a 0.1 percent rise.

In currencies, sterling fell 0.3 percent against the dollar to $ 1.4111, while the lag rose 0.1 percent against a basket of peers.

Brent oil, the international benchmark for oil, fell 0.3 percent, to $ 72 a barrel.