A just-published report reiterated that the summer rally in equities and credit should persist as inflation rates are peaking and global government bond markets have settled into a period of calm. However, the cyclical outlook remains risky for all financial markets, as inflation is not likely to return to most central bank’s target of 2%, absent much more restrictive monetary settings.
The revival of inflationary pressures has meant that the earlier subsidization of risk-taking by central banks (belatedly) came to an end. Worrisomely, after a 40-year persistent downward pull, our measure of the fair value for global government bond yields is now rising, underscoring that time will no longer benefit long bond positions. Thus, investors should tactically play the current cresting in inflationary pressures, but stay on guard for the next upleg in bond yields once current recession fears start to diminish. Stay tuned.