What Could Possibly Go Wrong?
In the bond market, the shift upward in yields is growing dramatic. In nominal terms, the 10-year Treasury yield is at last back where it was at the beginning of 2020, before the pandemic.
The real yield is still much lower, but has risen almost 50 basis points since its low near the end of last year
The bond market’s forecasts have not moved. Indeed, the implicit forecast for inflation over the next 10 years has dropped a little this year and is back below 2.5%
The markets are based on the assumption that rates will have to rise, but will do their job of bringing inflation under control
Cathie Wood’s famous ARK Innovation ETF
Then there’s China. The long-feared debt implosion caused by chronic over-investment in real estate since the Great Financial Crisis appears finally to be happening.
The greatest risk to the scenario that both stocks and rates can move higher is our old friend inflation.
There have only been two hiking campaigns this century. The first, started by Alan Greenspan, was so regular and predictable that it had minimal effect; the second, undertaken by Janet Yellen, didn’t last long.
It’s also worth remembering that stocks do tend to go up most of the time. That’s why we all spend so much time looking at the stock market.
The most important part of the bet that markets are now making is that inflation will indeed come down without too much coaxing.
John Authers Bloomberg 19 January 2022
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