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10-year high in the US at 3.19%
In recent weeks we have seen a significant turnaround in interest rates, particularly in longer duration, as markets appear to be pricing in lower long-term inflation expectations and the increasing likelihood of a more deflationary market regime emerging. The US 10-year Treasury yield has fallen over 50 basis points to around 2.78%.
The recent rally in bonds could be caused by a few different factors, the most obvious being the big institutional players like pension funds, which are in dire need of (and had) yields. The second factor at play could be the imminent economic slowdown in the United States, as bond investors (often touted as smart money) drive a slowdown in consumer spending and inflation expectations.
As bond yields fell, stock indices have rallied, with the S&P 500 currently trading 6.7% off its May 20 lows. As bonds and stocks bounce off local lows, prospects for a prototypical bear market rally appear to be in the works.
While inflation expectations for the next five years are 2.24%, current CPI inflation is 8.22% yoy, meaning the real return on all global fixed income instruments has been heavily negative. This dynamic has been a major focus of our research over the past year, and due to global debt, this needs to continue.
In 2022, the flood of liquidity has retreated. In due course, the tide will turn based solely on the realities of a debt-based monetary system. Any sensible investor will be looking for a safe haven for their capital.