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(Bloomberg) — Treasuries will face more pressure from inflation — but this time with China as a key catalyst not the US, according to some investors.Most Read from BloombergTwo-year yields climbed to their highest in three months on Tuesday after a stronger-than-expected US annual inflation rate surprised traders. But the chance of a renewed surge in commodities — driven by China’s reopening — risks ramping up that price pressure and pushing yields even higher, said fund managers including AllianceBernstein and Kapstream Janus Henderson.“We have seen the price of commodities such as iron ore, copper and steel rally after the China re-opening announcement,” said Pauline Chrystal, a portfolio manager at Kapstream. “Should this rally continue, this could add inflationary pressure and trigger another round of rates selloff, in particular in the front-end, as it would feed into an even higher terminal rate narrative.”Treasuries have found themselves on the back foot this month after a strong rally in January, as data showed the US labor market was outperforming expectations and consumer price growth was stickier than hoped for. Combined with hawkish rhetoric from Federal Reserve officials determined to quash inflation, expectations for peak US rates have begun to climb again.Fed Officials Float Even Higher Rates After Brisk Inflation DataA good proxy for gauging the potential impact from China’s reopening is the direction of energy prices. The International Energy Agency has boosted its forecasts for global oil demand following the easing of restrictions, and Brent crude oil futures have already climbed around 12% from their December low.Story continues“If we were to see stronger-than-anticipated pickup in oil prices, for example, that would then put upward pressure on headline inflation,” said Brad Gibson, head of Asia Pacific fixed income at AllianceBernstein in Melbourne. “Even though we think China’s reopening is marginally impactful, that impact is also for slightly higher rates, which supports tactically being a little bit underweight core global bond yields.”China’s Oil Buying Spree a Boost for Global Demand OutlookWith core bond markets in major economies priced for a deflationary environment rather than upside surprises, emerging markets look like a safer bet, according to Leonard Kwan at T.Rowe Price Group in Hong Kong.“Developed-market rates would be more vulnerable than local-currency markets to such an upshift in inflation expectations,” said Kwan, an emerging markets fixed-income portfolio manager in Hong Kong. “We like the outlook for EM local currency rates — yields are at multi-year highs and inflation has mostly peaked last year.”Still, not everyone is convinced that the impact of China’s reopening economy is an imminent threat.“You will undoubtedly see some decent pickup in China growth, but I’m not sure it’s gonna be enough to upset the slowdown we are seeing elsewhere in the world,” said Ariel Bezalel, money manager at Jupiter Asset Management last month. “Our thinking at the moment that it’s going to take a while, but I think the world might be a bit too excited by it.”Some also argue that this China recovery won’t be driven by infrastructure investment that fuels inflation, the way previous stimulus-driven growth spurts have. But should the world’s second-largest economy grow faster than anticipated, bets on a rapid pivot from the Fed that could lead to a rebound in Treasuries may have to be reconsidered.“If China’s recovery in growth adds 1-2% price pressure globally, this will further strengthen our base case assumption that the Fed will have to keep rates in restrictive territory for longer,” said Andy Suen, an emerging-markets fixed-income team portfolio manager at PineBridge Investments.–With assistance from Ruth Carson.(Updates with IEA forecasts in fifth paragraph. A previous version of this story corrected Brad Gibson’s title in sixth paragraph.)Most Read from Bloomberg Businessweek©2023 Bloomberg L.P.

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