Inflation has picked up, particularly, this year. In April, the year-over-year CPI increased by 4.2%, the highest figure in eight years. Excluding volatile food and energy prices, inflation rose by 3%.
Higher inflation expectations drive Treasury spreads wider
The market's expectation for future inflation has increased over the last several months. The 10-year TIPS break-even rate is now at 2.5% compared to 2% in January. The five-year break-even rate tells a similar story, rising to 2.7% from 2%.
With better economic growth prospects and higher inflation expectations, the 2- to 10-year Treasury spread increased to 148 basis points from 82 basis points since the start of the year. The wider spread was driven by higher long-term yields, with the 10-year yield sitting at about 1.6% compared to 0.9% in January.