The bond market reaction to this morning’s as-expected US consumer price report was telling. The 30-year bond gained a full point after the news, entirely due to lower inflation expectations. TIPS yields (indexed to inflation) were unchanged on the day as of 3 p.m., while the long-term inflation rate built into the spread between TIPS and ordinary Treasuries fell by 3 basis points, from 1.95% to 1.92%.

Source: Bloomberg

The curve of breakeven inflation expectations continues to flatten, and with it the overall yield curve. This means that the market believes that today’s tame level of inflation will continue far into the future.