The bond market has been mercurial in recent days and weeks. Nominal Treasury yields have fallen significantly since the beginning of March, while indexed yields have held broadly unchanged. As a result, the breakeven inflation rate in the market has fallen steeply in March to date, after having hit its highest in several years around the beginning of the month. But what does this tell us about the market’s take on the inflation and interest rate outlook?
Yields on nominal Treasury bonds spiked in the first two months of 2023, in line with the rise in inflation and the policy rate. As the chart shows, short-term Treasury yields had risen to approximately 8.3% and ten-year yields to roughly 7.0% by end-February, after having climbed by 1.4 and 0.8 percentage points, respectively, since the turn of the year.