It seems premature to conclude the uptrend in bond yields is over, certainly if breakeven inflation rates rise further. Yet, looking beyond the next few months, we see room for renewed bond bullishness.
Fresh fiscal stimulus in the US, coupled with growing hopes of post-vaccination economic reopening, has led to a sharp rise in nominal government bond yields across developed markets. The risk of such repricing had already been portended by the earlier rise in breakeven inflation rates. With nominal rates catching up, real yields in turn have risen noticeably, prompting verbal intervention from the ECB as this could undermine their pledge to preserve favorable financing conditions.
An interesting feature of the bond selloff is the steepening of 2s5s yield curves, in response to markets bringing forward rate hikes – to some extent challenging central banks’ forward guidance. While this could entice central banks to strongly lean against a further selloff, it seems premature to conclude the uptrend in bond yields is over, certainly if breakeven inflation rates rise further. Indeed, a comparison with previous selloffs suggest there may be more to come, perhaps reinforced by the prospect of higher headline inflation prints – which we discussed in the January update.
Looking beyond the next few months, we see room for renewed bond bullishness, as the relapse in China’s credit impulse points to much slower global manufacturing growth into 2022. China may indeed be showing bond vigilantes the way.
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