Overnight US inflation data showed that five consumer price indices rose 5 per cent year-on-year, the highest level since oil prices soared in the summer of 2008.

However, the yield on 10-year Treasuries rose only briefly after the inflation data, closing 11.9bp lower at 1.439 per cent, while Loco-London gold closed up 0.52 per cent at $1898.34 an ounce overnight.

Why don't US bond yields rise in the face of inflation?

Thursday's consumer price index exceeded economists' expectations, but the U. S. bond market did not intensify the sell-off. This is a counterintuitive reaction, as rising inflation erodes the value of Treasuries paid.

The market is likely to be moderate as investors bet that Fed officials will stick to their view that inflation will fall after last year's base effect weakens and maintain the current easing policy.

Dario Perkins, a global macro strategist at T.S. Lombard, wrote in a report on Thursday that even after the May data, "there are still great obstacles for the Fed to abandon its current policy position, and they have expected inflation to soar." Once inflation emerges, they will not panic. "

"looking at our inflation indicators, nothing can challenge the central bank's view that most of the recent price acceleration is temporary," he wrote. "the current pressure seems to be early, limited to specific sectors (related to the reopening), and the current supply bottleneck may be temporary. "

Strategists at Wells Fargo agree, writing that the report is "unlikely to change the Fed's outlook" for investors. Most Fed watchers expect the Fed to start talking about reducing bond purchases in the summer and early autumn.

However, next week's Fed meeting is likely to be the first test for the US bond market. If central bankers say they want to start easing sooner than expected, that could push yields higher. In fact, after yields fell below 1.5% earlier this week, strategists at TD Securities decided on Thursday to be bearish on 10-year Treasuries. They believe that sustained economic momentum and stronger inflation may lead central bankers to take a more optimistic view of the economy than investors expected at their June 15 and 16 meetings.

BCA Research also warned investors not to be too bullish on Treasuries. Treasury yields fell because investors were too pessimistic at the start of the year, when the Treasury market had its worst performance in about 40 years, the company said in a report on Wednesday.

They studied historical examples of "oversold" government bonds and found that the market often rose in the coming months. Their findings suggest that bond yields are likely to remain in the nearest range for another two to three months. That means August-which is also the time for the Fed's annual meeting in Jackson Hole, Wyoming-could cause more losses to the Treasury market.

"in addition, yields will rise as the Fed begins to prepare the market for a reduction in bond purchases in 2022," they wrote. "

Gold investors expect inflation to cool in the coming months

Gold futures closed slightly higher on Thursday as government data showed that US inflation climbed to a 13-year high in May, prompting gold prices to rise for the second month in a row.

JasonTeed, co-portfolio manager of the Gold Strategy Fund (Gold Bullion Strategy Fund): "so far, the market seems to agree that inflation is only temporary." If inflation continues to exceed expectations, gold prices may continue to rise, but if inflation starts to moderate, gold prices could lose some of their gains so far this year. "

"Gold actually found good support after the initial decline due to higher-than-expected inflation data," said Fawad Razaqzada, a market analyst at ThinkMarkets. He said gold investors seemed to agree with the Fed that "inflation will cool in the coming months, which means low interest rates will last longer."

The gold market has struggled to stay above the important psychological level of $1900 an ounce. Falling bond yields and a weak dollar have intermittently supported gold, but uncertainty about inflation has led to trading volatility.