Market Extra: Inflation expectations touch 3-year high after bond auction

An extended bout of low prices and tepid wage growth are showing signs of ending and that has government-bond investors bracing for a new inflation regime.

Rising inflation is anathema to bonds because it can erode the security’s fixed value, which is a notable headwind for longer-dated government paper.

Contributing to the anticipation of higher inflation are climbing commodity prices, improving global growth and lingering fears that tightening labor markets will eventually translate into higher wage gains. That has stoked fears that a pick up in what has otherwise been stubbornly low inflation will blindside Treasury buyers.

Investors appear to be guarding against an unwelcome surprise, with an auction in Treasury inflation-protected securities, or TIPs, on Thursday afternoon proving strong, driving up expectations for future inflation to a 3-year high.

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