Citigroup's rates trading desk has indicated that markets are excessively optimistic regarding the U.S. inflation outlook, making trades that profit from rising price pressures appear highly attractive.

According to Benjamin Wiltshire, a rates trading strategist at Citigroup, investors may be underestimating the resilience of the American consumer, and market expectations for inflation are likely due for a modest upward revision. In an interview, he stated, "The market seems convinced that inflation will decline, but we remain in a structurally high inflation environment."

Wiltshire recommends purchasing 5-year/5-year forward inflation derivatives, arguing that the current level of approximately 2.5% is too low. In comparison, the actual inflation rate remains higher—the Federal Reserve's preferred core inflation measure is still hovering near 3%, demonstrating significant stickiness.

Citigroup's advice to bet on rising U.S. inflation follows strong U.S. employment growth data released on Wednesday, which caught investors off guard. As traders scaled back their expectations for interest rate cuts by the Fed this year, U.S. Treasury yields surged.

On Thursday, U.S. bonds stabilized, with the 10-year Treasury yield dipping slightly by 1 basis point to 4.17%. Ahead of Friday's release of the January Consumer Price Index (CPI) data, traders are focusing on the initial jobless claims figures due later in the day as a key indicator of economic conditions.

Wiltshire noted that, after many were disappointed last year when U.S. tariff policies did not quickly translate into higher inflation, the market is now reluctant to price in inflation risk. He believes there is a lack of initiative in pricing an inflation premium, suggesting that, structurally, inflation risks are currently underestimated.