Bond-market gauges of short-term inflation expectations jumped to a record during the past week as oil and natural gas surged in the unfolding crisis.
Investors scooped up Treasuries that provide protection against inflation even as traders priced in that the Fed will cut rates in 2024 following the series of hikes expected to begin next month.
“This Russia-Ukraine crisis has accelerated the stagflation trend,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management.
Yet two-year yields jumped even more, narrowing the gap between the two to just under 40 basis points from 45.5 basis points a week earlier.
Fed Chair Jerome Powell will testify before Congress on Wednesday and Thursday, providing insight before policy makers enter their pre-meeting communications blackout period.
“The takeaway is that inflation will stay elevated, and the expected Fed tightening is going to be the catalyst for slower growth,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co.
Yet it rebounded after the invasion, with the inrush driving the the yield on five-year TIPS down by as much as 39 basis points on Thursday, touching negative 1.61%.