The current endless array of contradictory economic data releases, particularly in the US, in addition to other factors such as political and trade war rhetoric are making it difficult to decipher what is truly happening in the markets and the economies. John Pattullo, Co-Head of Strategic Fixed Income, discusses the major trends in the markets and provides an insight into the Strategic Fixed Income Team’s current thinking.

While conscious of the current inflationary impulse running through the markets, the team are not convinced that the trend will last more than a few months and that a real breakout into a sustainable higher growth and higher inflation is on its way. However, they remain open-minded and continue to look out for signs that could confirm whether there will be a soft or a hard landing in the US economy in the coming months.

Key takeaways:

  • In October 2018, when the markets were full of euphoria about growth and inflation breaking higher, expecting bond yields to rise, we held the opposite view. Over the interim, bonds rallied significantly and yields fell. Now, however, we believe that the trough in economic activity is with us.
  • Currently, bond and equity markets are sending contradictory signals; in the US, bond markets see the economy as late cycle, signalling a hard landing, while equity markets see it as mid cycle with a soft landing ahead. Queue: the re-emergence of reflation trades.
  • Reflation trades are not that uncommon; there have been thirteen since 2008, each lasting about one to nine months. There have been two this year: a mini one in April and the second since September, when bond yields bottomed and equities rallied significantly.
  • While we agree that the bond markets ran a little bit ahead of themselves and have now retraced some of their steps, we are not convinced that a big breakout of sustainable, higher growth and higher inflation is on its way. However, we remain open-minded as to whether the US, the largest economy in the globe, will face a soft or a hard landing.


In the video, John Pattullo mentions returns of the S&P 500 Index, the ICE BofAML CCC and Lower US High Yield Index and, ICE BofAML BB US High Yield Index, total returns in local currency, year-to-date to 31 October 2019. Past performance is not a guide to future performance.

Correction: ICE BofAML BB US High Yield Index is up 13.7% year-to-date and not 12% as mentioned in the video.