The Core PCE Price Index, the Federal Reserve's preferred inflation gauge, rose 0.2% month-over-month in December, as expected, from +0.1% in November, according to data released by the U.S. Commerce Department on Friday.
With few surprises in the economic data, fixed-income investors breathed a sigh of relief that inflation is not worse than feared as the bond market proxy iShares 20+ Year Treasury Bond ETF (TLT) fluctuated in early afternoon trading, making small moves to green from red and back.
On a year-over-year basis, core PCE, which excludes food and energy, climbed 2.8%, matching both the consensus estimate and the previous reading, although remaining well above the Fed’s 2% inflation target.
The recent flatlining of inflation data played a role in the Federal Open Market Committee’s (FOMC) decision Wednesday to pause rate cuts.
Following Friday’s data release, the probability of the Fed keeping rates unchanged at its March meeting was unchanged from yesterday at 82%, which is still up from 72% last week, according to the CME FedWatch Tool. The probability of a rate cut doesn’t rise above 50% until the June meeting.
According to etf.com data, TLT has maintained impressive flows in January, at roughly $2.3 billion, but they favor the high-yield and ultra-short bond ETFs, the Janus Henderson AAA CLO ETF (JAAA) and the iShares 0-3 Month Treasury Bond ETF (SGOV), with over $3 billion and $2.5 billion, respectively. This January flow data can indicate several key insights about inflation expectations and broader market sentiment:
Corporate bond ETFs like JAAA combine higher yields with the relative safety of AAA-rated collateralized loan obligations (CLO) securities can be attractive to fixed-income investors who are concerned about persistent inflation.
Ultra-short bond ETFs like SGOV have shorter durations, meaning they are less sensitive to interest rate fluctuations. If investors expect inflation to remain elevated or the Federal Reserve to keep rates higher for longer, they may avoid long-term bonds, which can lose value as rates rise.
When fixed-income investors prioritize high-yield and ultra-short bond ETFs over long-term bonds, it often signals inflation concerns, skepticism about near-term rate cuts, and confidence in economic stability. This behavior suggests that the market is pricing in higher-for-longer interest rates and that investors are seeking ways to preserve yield while managing duration risk.
Story Continues
