Bond Market Bogeymen Make a Return Appearance

Bond traders blink.

Photographer: Michael Nagle/Getty Images

What a difference a few days can make in the bond market. Last week, traders were using phrases such as "melt up," "short squeeze" and "capitulation" to describe the rally in Treasuries that sent yields to their lows of the year without any real change in the usual fundamental economic underpinnings that drive interest rates. This week, the euphoria has been replaced by a sense of loathing.

At the heart of the reversal in sentiment is the worry that the two traditional foes of bond traders — inflation and supply — are about to make a reappearance. Thursday's consumer price index data only reinforced those notions, as the cost of living accelerated following a five-month-long period of dormancy.

The report comes on top of the scenes of destruction from Hurricanes Harvey and Irma, with traders waking up to the realization that a massive wave of government spending is on the horizon as homes are rebuilt and infrastructure improved. The reconstruction will only exacerbate an already tight labor market, raising the odds of faster wage inflation looming after a long period of stability.