Since June, US 10-year Treasury yields have risen by a reasonable margin, developed economies have witnessed a reflationary uptick and markets have focused heavily on expectations of a US rate hike in December and fiscal expansion policies to appear.
John Pattullo, Co-Head of Strategic Fixed Income, believes that markets may be misguided and the 'reflationists' are getting a little carried away. We are still in a long term structural downward trend, with continuing low growth, low inflation and low defaults. The inflation uptick is unlikely to translate into a persistent trend.
Given the current backdrop, John and his colleagues see many reasons not to deviate from their current strategy of looking for sensible, dependable carry (coupon).
- The inflation uptick in a number of countries is 'headline' inflation and not 'core' - unlikely to translate into a persistent trend
- The UK will experience much higher inflation levels next year, but it is unlikely to invoke an interest rate policy response; this is the wrong sort of inflation
- The grab for yield continues on a global scale, and with little value in Europe, investors are flocking to the US
- Secular stagnation, balance sheet recession, demographics, low productivity, the gig economy and digitalisation are all credible reasons for why bond yields will stay contained at low levels