By Ben Eisen

Donald Trump's victory has unleashed investor bets on rising consumer prices, a trade that has been tried often in recent years with little lasting success.

A bond-market gauge on Thursday hit its highest level since the summer of 2015. The 10-year break-even inflation rate indicated expected annual inflation of 1.89% over the next 10 years. That measure, reflecting the gap in yields between Treasurys and their inflation-protected counterparts, known as TIPS, was 1.73% two days ago, according to Tradeweb.

The yield on the 10-year Treasury note, which rises when bond prices fall, climbed another 0.05 percentage point on Thursday to 2.118%. It has jumped a quarter of a percentage point since before the U.S. election result, the biggest two-day rise since 2011. Nominal bond rates have been rising faster than those protected against inflation, meaning that inflation protection is increasingly viewed as the more attractive investment.

The bond selloff is the latest example of the wagers investors have placed that Mr. Trump will succeed in speeding the economy and pushing up prices, by boosting spending on infrastructure, cutting corporate and personal income taxes, and encouraging corporations to repatriate overseas cash. If enacted by a Republican-controlled Congress, the policies could help heat up tepid growth and add to U.S. deficits, potentially bolstering inflation, which has lingered below the Federal Reserve's 2% annual target for more than four years, many investors say. But betting on inflation is a trade some investors have been making on and off for years, with limited success.

"It's one of three or four favored trades that work in bursts on occasion," saidJim Vogel, an interest-rate strategist at FTN Financial. "It's only succeeded in small amounts over short periods."

One spark for the latest inflation trade came when Mr. Trump mentioned infrastructure spending prominently Wednesday morning in his victory speech, investors say. Others believe efforts to repeal financial regulations enacted by President Barack Obama's administration could expand bank lending activity, and that restrictions on trade could boost wages in an already strong labor market.

Other assets that have gained since the election include financial stocks, which outperformed the broader market, and copper futures, which climbed 3.7% Thursday.

At the same time, the force behind the trade over the past two days has led many to grow skeptical, saying that the climb in inflation expectations is based in part on unfulfilled hope. Mr. Trump doesn't take office until January, and his policy priorities aren't fully known, making TIPS and other products linked to inflation susceptible to a reversal at any time if, say, disappointing inflation data arrive meanwhile.

Investors have been betting on a rise in inflation since late June, due to climbing prices for services and stabilizing commodities. Since the beginning of November, they have poured a net $1.45 billion into the largest exchange-traded fund tracking TIPS, the iShares TIPS Bond ETF, including $91.9 million on Wednesday, according to Morningstar.

Raman Srivastava, managing director of global fixed income at Standish Mellon Asset Management Co., said his firm added to holdings of TIPS and other global inflation-linked securities on Wednesday after the election.

"We think there's pressure [pushing up] inflation even before you talk about stimulus from the U.S. government," he said. "This new development in regards to the election increases the odds of that."

Market-derived inflation forecasts are controversial since they can bounce around based on short-term factors like the oil price. While the Fed has indicated that it looks at break-evens as one market gauge, it describes them as compensation for the risk of inflation, rather than an outright expectation. A separate survey-based measure of inflation expectations was at its lowest on record last month.

The most recent move has been confounding in part because it has little to do with corresponding moves in other markets. Oil is down slightly since before the election results, and gold prices haven't seen a similarly sharp climb. Inflation expectations in other countries have been relatively muted, Mr. Vogel noted.

One way to look at that divergence in inflationary assets is to observe correlations, which look at the relationship between two independent variables. A correlation of 1 means they move together in lockstep while a correlation of -1 means they rise and fall in exactly the opposite direction.

The 20-day rolling correlation between crude and the 10-year break-even inflation rate fell to minus-0.50 on Thursday from as high as 0.95 in mid-October, according to data from WSJ Market Data Group and Tradeweb.

Still, investors appear enthused by rising inflation expectations, partly because Mr. Trump's election and the shifting makeup of Congress, if nothing else, mean a sharp change from a period in which central banks struggled to spur inflation.

BlackRock Inc., Pacific Investment Management Co. and other bond powerhouses have recommended TIPS in recent years. Martin Hegarty, head of inflation-linked bond portfolios at BlackRock, said he briefly added to bets on a rise in long-term bond yields following the election results.

"I do believe that the potential for tax reform and for a different regulatory environment in an already tight labor market has the potential to push up the run rate of inflation," said Mr. Hegarty.

Write to Ben Eisen at ben.eisen@wsj.com

(END) Dow Jones Newswires

November 10, 2016 18:56 ET (23:56 GMT)

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