Inflation higher, bond yields lower. Why?

The November inflation numbers came in hotter as expected.

CPI inflation:
+0.8% m/m vs. +0.7% est. & +0.9% in prior month;
y/y at +6.8% vs. +6.8% est. & +6.2% in prior year …
Core CPI:
+4.9% y/y vs. +4.9% est. & +4.6% in prior year

This shows that inflation grew at fastest rate since the 1980s.

For bond traders, the initial reaction led to lower yields across the board. The expected reaction to higher inflation was higher short duration bond yields. However, this has not materialized.

Any narrative why yields are not higher?

Every time the FED signaled asset purchases tapering in the past, yields have historically gone lower.

With the US economy at full employment (JP Morgan), and inflation above the AIT set last year, investors are expecting a faster taper of asset purchases. BoA has mentioned that inflation needs to be reigned in and a growing number of traders agree that the FED is behind the inflation curve. This will prompt the Central Bank to react faster.

Therefore, the most credible narrative shows that yields will head lower as the FED starts to prepare for rates liftoff. Consensus within different banks & Institutions shows traders are betting the first 25bps hike could be as early as June 2022

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