Citigroup Inc.'s rates trading desk is flagging a disconnect between market pricing and actual inflation readings in the United States, arguing that markets have likely underestimated future price pressures and that inflation-linked strategies now look appealing.
Benjamin Wiltshire, a strategist on the bank's rates desk, told Bloomberg News that market participants appear convinced inflation will fall, a view he questioned. "Markets seem to have this conviction that inflation is going to come down," Wiltshire said. "We’re still in a structurally higher inflation environment."
Wiltshire highlighted one specific instrument he believes is mispriced: the five-year five-year inflation forward. According to the strategist, these forwards are trading at roughly 2.5 percent, a level he considers too low when compared with current inflation measures. He contrasted that market-implied rate with the Federal Reserve's favored gauge of underlying inflation, which he noted remains persistent at just under 3 percent.
The strategist's view points to a gap between market expectations and the inflation readings that policymakers and analysts are watching. That gap, Citi says, could create opportunities for traders willing to take positions that profit if inflation proves stickier than markets now forecast.
From Citi's perspective, the combination of resilient consumer behavior and a higher structural inflation baseline means investors may need to revise their outlooks upward. The recommendation to buy inflation forwards is presented as a way to express that view through instruments directly linked to consumer price movements over a defined forward-looking window.
While the rates desk frames the position as attractive at current levels, the note underscores the fundamental uncertainty in forecasts and the reliance on market repricing to capture potential gains. Traders and portfolio managers focused on inflation-sensitive instruments and fixed-income allocations are the primary audience for this call.
Implications
- Inflation-linked securities and fixed-income markets could see increased interest if investors follow Citi's recommendation.
- Persistent underlying inflation readings may force a reassessment of market pricing for medium-term inflation expectations.
- Traders betting on higher-than-expected inflation would likely target instruments such as five-year five-year inflation forwards.