A reversal in interest rates shows that markets are pricing in lower inflation expectations and a growing likelihood of a deflationary market on the horizon.
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US 10-year peaks at 3.19%
Over the past few weeks, we have seen a sharp reversal in interest rates, particularly at longer durations, as markets seem to price in lower long-term inflation expectations and the growing likelihood of a regime. more deflationary market on the horizon. The yield on 10-year US Treasuries fell more than 50 basis points to around 2.78%.
The recent rally in bonds could be caused by a few different factors, the most obvious being large institutional players such as pension funds that are (and have been) desperate for yield. The second factor at play could be the impending economic slowdown in the United States, as bond investors (often touted as the smart money) anticipate a slowdown in consumer spending and inflation expectations.
With bond yields falling, equity indices have rebounded, with the S&P 500 currently trading 6.7% off its May 20 lows. As bonds and stocks bounce off local lows, the prospects for a prototypical bear market rally appear to be looming.
While forward inflation expectations for the next five years stand at 2.24%, current year-over-year consumer price inflation is at 8.22%, meaning that the real return of all global fixed income instruments was deeply negative. This dynamic has been the focus of our research over the past year and, given global debt levels, will need to persist.
In 2022, the tide of liquidity has receded. In due time, the tide will turn, based solely on the realities of a debt-based monetary system. Any rational investor will seek a safe haven for their capital.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.