Investors will continue to look closely at U.S. macro data for any sign that growth may disappoint or inflation could surprise on the high side, putting pressure on rates to move up faster than expected.

Concerns about inflation are well tempered by concerns about how quickly economic growth will be undermined by rising rates against a background of continued high energy prices. When the evidence of that appears in the numbers, the bond market's low long-end yields will look justified.

Inflation is still a threat when U.S. economic growth is relatively strong. It will weigh down Treasuries.

The debate over inflation versus growth will linger on because it is true that there is a short-term trade-off - if you want growth you've got to live with inflation.

If anything, this confirms the Fed's bias towards inflation rather than worrying about a slow down in growth. The Fed seems to have no worries about growth, as least as far as manufacturing is measured by ISM.

We expect the combination of solid economic growth and higher inflation risks to push the Fed to raise rates higher than is implied by prevailing bond yields.