By Daniel Kruger 

Bond investors are betting inflation is making a comeback.

Market-based measures of inflation expectations have climbed in recent weeks, lifted by investors' falling concerns about a near-term recession and growing comfort with riskier assets.

The average inflation rate investors expect during the next 10 years -- measured by the gap between the yields of 10-year U.S. government debt and Treasury inflation-protected securities of similar maturity -- has risen to about 1.7 percentage points from roughly 1.55 percentage points at the end of last month. The so-called 10-year break-even rate earlier this week recorded its largest six-day gain since November 2016, climbing 17 basis points from the end of last month.

The 10-year break-even rate was a recent 1.68 percentage points, according to Tradeweb. The yield on the benchmark 10-year Treasury declined for a second consecutive trading session, settling at 1.870% compared with 1.909% Tuesday. Bond yields fall when their prices rise.

Inflation expectations had fallen below 1.5% -- a level analysts said was consistent with expectations for a recession -- as recently as last month.

Investors said the Federal Reserve's three interest-rate cuts this year have boosted the prospects for inflation, and few believe it will climb fast enough for policy makers to need to raise rates soon. Officials have been rethinking their approach to inflation, expressing a willingness to let prices rise faster than the Fed's 2% target to compensate for the long period below that level.

"If we let this run, some inflation will come back," said Rob Waldner, chief strategist and head of multisector portfolio management at Invesco. His firm has made bets that the break-even rate will rise as the economy continues to grow.

Break-even rates are still relatively low on a historical basis, held down by decelerating growth and oil prices that are well below their highs for the year. But investors now expect inflation to pick up next year. Nearly one-in-three fund managers in a Bank of America Merrill Lynch survey expects that inflation will accelerate in the next 12 months, up from near zero in recent months.

The consumer-price index rose 0.4% last month, the Labor Department said Wednesday. That was more than the 0.3% increase predicted by economists in a survey by The Wall Street Journal. From a year earlier, consumer prices in October were 1.8%, higher than the 1.7% year-over-year increase seen in the previous two months.

A weaker dollar could also lift inflation, said Rick Rieder, chief investment officer of global fixed-income at BlackRock Inc.

A falling dollar typically boosts inflation by making imported goods more expensive while also adding stimulus to the economy, Mr. Rieder said. He has added to bets that the break-even rate will rise in accounts that he manages.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, fell less than 0.1% to a recent 91.11. It has declined 1% from a multiyear high at the end of September.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

November 13, 2019 17:02 ET (22:02 GMT)

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