As the Federal Reserve works to extricate itself from the bond market, its influence over debt investors is only increasing and boosting the chance of a soft landing for Treasuries.
While the Fed scales back the unprecedented stimulus that has inundated the world's largest economy with more than $3 trillion of cheap cash, the differences between short- and long-term yields of U.S. government bonds indicate that investors are confident Fed Chair Janet Yellen can keep inflation in check as growth rebounds without having to ratchet up interest rates.
The relative calm clashes with forecasters who say investors have grown too complacent over the direction of central bank policy with consumer prices climbing the most in more than a year and signs of labor-market strength. Bond bulls are instead focusing on the Fed's reduced estimate for how high rates ultimately need to rise and echoing the view of Pacific Investment Management Co.'s Chief Economist Paul McCulley, who said this month the taming of inflation starting in the 1980s means there's little risk in keeping borrowing costs low.
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