If bond markets are taken at their word, the world post-pandemic will be defined by stagflation, a toxic scenario that appears at odds with the bounceback indicated by robust economic data and record-high equities.
The 10-year U.S. breakeven rate, the inflation level where returns on nominal bonds and TIPS would be equal, is now at 2.35per cent. Second, slowing economic momentum, as U.S. data surprises have turned negative, according to indexes compiled by Citi. Interest rate swaps now imply the Fed policy rate in five years' time - a proxy for the"terminal" interest rate - to be 1.14per cent, ING Bank notes. Back in March it was expected to be some 70 bps higher.
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