News – AU – The major reflation trade in the global bond markets

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One of the most important questions is how the central banks react to the rise in interest rates and whether there are circuit breakers that could stall or vice versa â ???? the recent rise in interest rates

The government of US President Joe Biden has passed a “go big or go home” Strategy, with a $ 9 trillion ($ 2 45 trillion) fiscal stimulus package due to be approved in mid-March and a sizable infrastructure bill expected to be enforced later this year

That incentive, coupled with the increasing profits from the vaccination campaign, has improved prospects for growth in the US Many analysts expect the economy to grow 6 to 7 percent this year

The US government incentives coupled with the increasing profits from the vaccination campaign have improved the outlook for US growth Many analysts expect the economy to grow 6 to 7 percent this yearSimon Letch

In addition to rising growth expectations, there is a parallel debate about inflation.As a vaccinated economy shakes off the pressures of the pandemic, demand is likely to be ahead of supply, at least temporarily.Companies need some time to bring employees back, formulate production plans, restart supply chains and ramp up production

In these circumstances, occasional bottlenecks and bottlenecks can boost inflation, but central banks are already promising to look through such developments They label “one-off shifts in relative prices” and no indication of widespread or persistent inflation

These seismic shifts in the outlook for growth and inflation have in turn triggered a massive “reflation trade” in global bond markets While the United States was the epicenter of this move, with 10-year government bond yields increasing 50 basis points in the past three months, 10-year government bond yields in Germany and France are up around 25 basis points, and a proud 70 basis points in Australia

What is striking is that the fundamentals of these reflationary dynamics show little sign of easing. In fact, if this year develops anywhere near expectations, we are on the lip of a barrage of good news and interest rates might Rise Even Higher Some investors call this Trade of the Decade

While I’m going to have bond traders figure out exactly where and when yields will peak, this discussion raises some related questions: How will central banks react to the rise in interest rates? Second, are there any circuit breakers that might block? or vice versa â ???? the recent rate hike?

On the first of these questions, as someone who has spent nearly two decades in the US Federal Reserve, I can say that raising long-term interest rates is a dilemma for central banks. Supporting the economy was their primary goal during the pandemic, hence the brightening of the outlook is to be welcomed. More fundamentally, many central banks have struggled with below-target inflation for many years. In a sense, reflation is exactly what they have been pursuing
Nonetheless, central banks need to watch rising rates with caution. If the rate hike beats fundamentals, it could hurt the recovery. This is the fine line central banks must take in formulating their policies

Regarding the second question, there are several factors that could short-circuit the rate hike. First, as the year progressed, some elements of the “strong boom” narrative may not materialize. Perhaps the vaccination campaign stumbles, people stay in even after vaccination their output behavior conservatively or a larger part of the stimulus is stored permanently

A second possibility is that despite central banks ???? To the best of their ability, the rate hike could retreat and the recovery slow. Sectors such as housing, automobiles and other durable goods would be vulnerable

Third, markets are inherently forward-looking and should worry about the outlook for the economy once the rebound is over. What happens next after the surge associated with vaccines and tax incentives plays through?

Basically the private sector and “normal” ???? Income-generating mechanisms should be enough to support expansion by then, but if vaccines and fiscal incentives push spending too far beyond sustainable levels, the downward revision after the extraordinary support is removed could be more bumpy than expected

It is often said that elections have consequences and given the improving outlook for growth and inflation, it certainly seems to be the case.Despite the expected recovery in activity this year, the medium-term outlook for the global economy remains moderate at best Structural trends such as demographic aging and high debt remain wide widespread and likely to stifle growth and inflation and set an interest rate cap medium term

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Inflation, Federal Reserve System, Europe, Jerome Powell, Risk

News – AU – The big reflation trade in global bond markets

Source: https://www.afr.com/wealth/personal-finance/the-great-reflation-trade-in-global-bond-markets-20210301-p576t4