Editor's Note: Below is an excerpt and chart from this morning's Early Look market note. It was written by our U.S. Macro analyst Christian Drake.
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As it stands, the prevailing bond bear narrative remains a cogent and congruous one: Strong growth and the prospect of higher inflation alongside expansionary, debt-financed fiscal policy at a time when the labor market is at/near full-employment and in concert with Fed balance sheet unwind and reduced foreign demand for treasuries remains the conceptual underpinning. But, the spread between nominal Treasury and LIBOR yields to swaps continues to widen and while breakevens and inflation swaps have risen (i.e. inflation expectations ↑), real yields have risen by even more. For context: 10Y yields are +80bps since the latest September low. TIPS yields are up +47 bps over the same period, implying that rising inflation expectations only represent ~33 bps of the +80 bps increase in nominal yields. The rise in real yields can be viewed as some combination of higher real growth expectations, higher term premiums … or something else. The current speculation centers around diving that ‘something else’ and the probability of that ‘something’ being the prospects of rising twin deficits. |
