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US 10-year peak at 3.19%
Over the past few weeks, we have seen a sharp reversal in interest rates, especially over the longer term, as markets are pricing in lower long-term inflation expectations and there is an increased likelihood of a more deflationary market regime on the horizon. The US 10-year Treasury yield fell 50 basis points to nearly 2.78%.
The recent rally in bonds could be due to a few different factors, most obviously large institutional players such as pension funds that are (and have been) in dire need of yield. The second factor at play may be an impending economic downturn in the United States, as bond investors (often referred to as smart money) face a slowdown in consumer spending and inflation expectations.
Equity indices have rebounded, with bond yields falling, with the S&P 500 currently trading down 6.7% from its May 20 lows. A prototypical bear market rally appears to be in the works, with bonds and equities bouncing off local lows.
final note
While forward inflation expectations for the next five years are sitting at 2.24%, consumer price inflation in the current year stands at 8.22%, meaning the real yield across all global fixed income instruments has been deeply negative. This dynamic has been a focus of our research over the past year, and will need to continue, due to global debt levels.
In 2022, the tide of liquidity is pulling back. In due course, the tide will reverse, based entirely on the realities of a debt-based monetary system. Every rational investor would be looking for a safe haven for his capital.