Everyone is talking about the sell-off in bonds these days. Yields on the US 10-year benchmark is up nearly 150bp since April, within touching distance of 5%, and 30-year yields are now just over 5%, up from 3.7% in April. With the two-year yield up just 100bp over the same period, the curve has bear steepened by 50bp, and is now looking to un-invert due principally to a sell-off in long bonds, contrary to widespread expectations of bull-steepening via a rally in the front end. The 2s10s is still inverted by around 17p , but the 2s30s is now—as far as I can see from the close on Friday the 20th of October—just about positive. No wonder that the long bond is on everyone’s mind. Sustained bear-steepening during inversions are rare sights in G7 bond markets, so when they are spotted in the wild, they tend to grab the attention and imagination of investors and analysts. But what does it mean? Put on the spot, I’d say that bond market volatility is underpriced.
Read MoreI have a few speaking engagements coming up, prompting me to update my view on the world beyond the borders of the Eurozone, which makes up the day job. One trend that I am looking forward to present to, and discuss with, investors and capital allocators is the tension between signs that the inflation and interest rate shocks are now fading, in a cyclical sense, and the risk that inflation will stabilise above 2%, posing a challenge for monetary policymakers. Will they channel their inner Volcker or fudge the 2% inflation target?
Read MoreI've written a lot about inflation recently. I still think markets are at the mercy of inflation and the triumvirate of doom, which means that the U.S. inflation report is likely to remain the most economic piece of data for markets, for the foreseeable future. I haven't been looking at the inflation trades for a while, however, which I will seek to make amends on here. Falling inflation eventually will allow central banks to perform the much-discussed pivot, both in terms of the speed of tightening and eventual terminal rate. The latter follows naturally from the fact the tightening cycle's end point inevitably draws nearer as central banks continue to raise rates. An even bigger question is what inflation regime will emerge once the current fever breaks—and it will break, eventually. Markets ought to be able to tell us something about that.
Read MoreIn my last view on markets, I asked whether inflation fears had peaked? Judging by the price action since, the answer would seem to be yes, tentatively. It’s a cliché, but true. Markets trade at the very thin margin of the flow of economic information, and this edge has shifted in the past month. Inflation is still high, but it is no longer accelerating rapidly, and evidence of increasingly fragile economic activity is piling up. The headline surveys have weakened materially, especially in Europe, and we recently learned that the US economy entered a technical recession in the first half of the year. For markets, this means monetary policy tightening will be less pervasive, both in terms of speed and sustainability. Upside inflation surprises now are associated with sharp flattening, even inversion, of interest rate curves, as markets perceive the window for policy tightening closing, fast.
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