ING: Why Aren't Rates Even Higher?

ING suggests that Wednesday's US CPI print means that "we are no longer in a 2% inflation environment, it's likely not a 4% one either, but it is comfortably a 3% one."

• In turn they see the directional move in rates higher (higher real rates, higher breakevens, higher nominals) as logical, but note "it is the levels that poses most questions. If we are in a 3% underlying inflation environment, why then is the 10yr rate struggling to break above 1.7% in a sustained fashion? And moreover, why is the market 10yr real yield at -90bp?"
• They provide two possible answers: one, that rates are simply mispriced at this level. But they concede that's not a great explanation given constant buying-and-selling in Tsy markets: buying of linkers "by definition pushes real rates down". Two: "the US 10yr rate is just a number that market participants can choose to take or leave, irrespective of where inflation is. A bit flaky, but in effect is as good enough a rationale as any."
• ING sees upward pressure on both real and nominal rates "either way".